In this issue:

It’s hard to sugarcoat the current situation for energy investors, and we wouldn’t be inclined to try even if it were easy.

It’s true that current oil prices no longer provide a sufficient profit motive to balance supply and demand over the long run, short of a global recession. But commodity prices are famously impervious to long-term fundamentals in the short run, which can be measured in months and possibly years rather than weeks and days.

It’s also true that many of the recommendations in our portfolios, including the severely beaten down shale drillers, continue to offer long-term value, but markets can remain irrational longer than any of us can remain solvent. All investments, but especially those in crashing, deeply and persistently oversold equity sectors, need to be approached and sized with that in mind.

Much as it chafes us not to have been sufficiently patient in picking our spots on buy recommendations last month, at least we warned readers not to bet the farm and noted the strong possibility that lower lows were coming.

The key to weathering extreme situations like this one is to stay alert and patient at the same time, to be willing to respond to new information rather than remaining paralyzed by past expectations, and yet also to be willing to tolerate hefty losses and the emotions of fear and regret they generate without selling simply to feel better right now.  Sell to reduce your risk to tolerable levels, sure. But realize that sleeping better at night is the main and possibly only benefit you’ll be realizing.

With so much negativity swamping the energy sector, this seemed like a good time to explore what’s recently been working, and unsurprisingly downstream refining and retailing plays have done well, along with a diversified MLP leveraged mainly to natural gas and a lucky buyout recipient.

As for what hasn’t worked, Bakken oil producer Emerald Oil (NYSE: EOX) is at the top of that list, and it absorbed another pounding today that was widely ascribed to its plan to curtail drilling. We think a seriously dilutive deal with two investors in Emerald’s convertible securities is the likelier culprit, and the transaction frankly has us reconsidering our faith in management.

We now see more safety, and just as much upside, in a somewhat larger driller working Colorado leaseholds more economical than most in the Bakken at current oil prices. Our confidence in Bonanza Creek Energy (NYSE: BCEI) is bolstered by recent insider buying and an investment by a well-known hedge fund. These omens hardly guarantee anything. But at least a dilutive share issue is not on an agenda.

Given the current state of the markets for crude and energy stocks, fundamentals and sentiment can only improve over the medium term. Just don’t expect it to happen on our schedule.

Portfolio Update

• Emerald Oil (NYSE: EOX) downgraded to Hold in Aggressive Portfolio

• Bonanza Creek Energy (NYSE: BCEI) added to Aggressive Portfolio. Buy BCEI below $23

Commodity Update

Crude oil futures have dipped to their lowest level in five years. Since our previous report West Texas Intermediate (WTI) fell to $58.10 a barrel (bbl), down $11.06/bbl since our previous issue. Brent was down $11.03 over the past two weeks to $62.06/bbl. Natural gas took a tumble since our previous report, down $0.41 per million British thermal units (MMBtu) to $3.80/MMBtu. This week’s Weekly Natural Gas Storage Report showed that inventories are now 9.5% below the five-year average, and 5.2% below their level at this time last year. Over the next few months, the type of winter we experience will be the biggest factor for natural gas prices.

In Other News

• U.S. Representative Joe Barton introduced a bill to lift the 40-year ban on exports of crude oil. It has almost no chance of getting enough votes for passage;

• The Federal Energy Regulatory Commission (FERC) voted to approve the $683 million Constitution Pipeline that will connect natural gas producers in the Marcellus to customers in New England. The pipeline project is a venture between Williams Partners (NYSE: WPZ), Growth Portfolio holding Cabot Oil & Gas (NYSE: COG), Piedmont Natural Gas (NYSE: PNY) and WGL Holdings (NYSE: WGL);

• In response to plunging oil prices, Conservative Portfolio holding ConocoPhillips (NYSE: COP) announced that it would cut capital spending by 20% next year to $13.5 billion;

• Jefferies downgraded a number of oil services stocks after cutting Brent forecasts for 2015 from $92/bb/ to $70/bbl;

• Goodrich Petroleum (NYSE: GDP) and Aggressive Portfolio holding Oasis Petroleum (NYSE: OAS) both announced that they will probably slash their exploration and production budgets for 2015 in light of the plunge in oil prices.