Crash Helmets On
In this issue:
It’s been a blood-curdling start to a new year for energy investors, and the pain is far from over given the damage that will continue to be inflicted on producer balance sheets even if crude were to rally 30% from current levels. Don’t fall into the traps of dismissing the market as irrational or failing to protect your capital by refusing to lock in losses. Upstream stocks are down a lot but most are hardly cheap for businesses losing money on sales of a dramatically glutted commodity.
Our new Best Buys list seeks to take advantage of the oil crash by focusing on its likely beneficiaries, including producers of natural gas that’s likely to benefit from crude output cuts as well as the downstream fuel distributors. For now, the rest of our picks are holds, not buys, and some of the few crude producers we haven’t already purged will be sells in short order.
We also remain bullish on midstream MLPs, which have suffered a crash out of all proportion to their exposure to crude oil. Those with capital spending funding gaps are already addressing them with debt sales and private equity placements. Very few should have to resort to distribution cuts. And when investor sentiment does turn, as it will, the sector should see quite a bounce.
- Cabot Oil & Gas (NYSE: COG), EQT (NYSE: EQT), Energy Transfer Equity (NYSE: ETE), Magellan Midstream Partners (NYSE: MMP), Enterprise Products Partners (NYSE: EPD), Delek Logistics Partners (NYSE: DKL), PBF Logistics Partners (NYSE: PBFX), Global Partners (NYSE: GLP), AmeriGas (NYSE: APU), Capital Products Partners (NYSE: CPLP) ranked in that order as Best Buys, with new buy limits
- Other portfolio recommendations rated Hold
Oil prices have taken a sharp dive since our previous issue, as concerns about rising global crude inventories (among other things) have led to broad-based panic selling. Since our previous issue, West Texas Intermediate (WTI) has shed $8.20/bbl, falling to $28.66/bbl. Brent crude fell $8.51 to $28.24/bbl. These are prices that haven’t been seen in 12 years, and frankly prices that we doubted we would ever see again because they are so far below the sustainable price for the world’s crude oil producers. If it’s any consolation (and it probably isn’t) the longer prices remain depressed, the harder they are likely to overshoot to the high side when the inevitable recovery comes. Natural gas remains weak, dropping $0.01/MMBtu since our previous issue to $2.15/MMBtu. But in comparison with the carnage in the crude oil market, natural gas is holding up just fine.
In Other News
- Arch Coal Inc (OTCMKTS: ACIIQ) filed for Chapter 11 bankruptcy protection
- BP (NYSE: BP) announced plans to cut another 4,000 jobs from its global oil production operations this year
- ConocoPhillips (NYSE: COP) became the first company to export crude following the repeal of the export ban. It sold the crude to the Dutch trading company Vitol Group, loading the cargo the last week of December at NuStar Energy’s (NYSE: NS) North Beach Terminal in Corpus Christi, Texas
- ConocoPhillips also announced the first cargo of liquefied natural gas has shipped from the $17 billion Australia Pacific LNG megaproject in Queensland, Australia
- President Obama suggested in his State of the Union address that royalty rates for producing oil and coal on federal lands should be increased
- Oil prices have fallen below $30/bbl for the first time in 12 years.