Uncovering the Little Darlings

There is a lot of ground to cover in the energy sector. In order to cover it, I use stock screens to find companies with the most appealing prospects.

As I’ve mentioned before, I have developed a proprietary screening tool that extracts data from the S&P Global Market Intelligence database. To understand why screens are so important for parsing the universe of energy companies, consider that the top level of my latest screen identified 66,678 companies around the world in the energy sector. That doesn’t even count most renewable energy companies, which are generally ranked in other categories. (I use different screens to track these.)  

As I screen, I first narrow down the list by removing companies that aren’t publicly traded. I then usually further restrict the screen to those categorized as operating companies that have issued common stock or depositary receipts trading on the U.S. or Canadian stock exchanges. Doing so narrowed my latest screen down to a more manageable — but still daunting — 1,230 companies.  

At this stage I will normally sort companies according to subsectors, which include:

  • Coal and Consumable Fuels
  • Integrated Oil and Gas
  • Oil and Gas Drilling
  • Oil and Gas Equipment and Services
  • Oil and Gas Exploration and Production (“upstream”)
  • Oil and Gas Refining and Marketing (“downstream”)
  • Oil and Gas Storage and Transportation (“midstream”)

It is only then that I will begin to screen the different subsectors for financial metrics. I wait until this stage because the metrics for a large midstream MLP like Magellan Midstream Partners (NYSE: MMP) will look quite different from those for a small upstream company like Carrizo Oil & Gas (NASDAQ: CRZO). So I compare within subsectors. If I believe the upstream sector is poised to do well, I will compare promising candidates in that group.

Of course this screen is just one tool I use to flag promising companies. The next stage of due diligence requires delving into the particulars of specific companies. What is their outlook? The market’s expectations? Are there red flags? These are the types of things a screen can’t tell you.

For example, this past weekend I ran a new screen. Instead of breaking energy stocks up by subsector and comparing financials, I simply wanted to know which ones are currently most beloved by analysts. For this screen I specified that the stock had to be followed by more than a single analyst, and required an average recommendation of at least “Outperform,” or 2, on a scale that goes from 1 (“Buy”) to 5 (“Sell”).

The screen identified 291 stocks fulfilling these criteria. Only three had an average broker rating of 1.00 (indicating all brokers following the stock had it listed as “Buy”). Here is the Top 10 according to average broker rating:


  • EV – Enterprise Value in millions of dollars as of April 8, 2016
  • FCF – Free cash flow for the trailing twelve months (TTM)
  • YTD Ret – Total shareholder return (TSR), including dividends, in 2016

At first glance, most of the names on this list are probably unfamiliar. These are mostly small companies, which I could have screened out by requiring a minimum enterprise value or else a larger analyst following than two. A screen that required a minimum EV of $3 billion would have contained stocks more familiar to readers at the top.

Only two companies on the list have more than 10 analysts following them, and despite the strong recommendations both of those are down double-digits year-to-date. The top 10 shown here is down 10% year-to-date on average.

Scanning the list I immediately see a number of companies that wouldn’t pass my first level of due diligence, but keep in mind that the objective here was just to see what analysts are recommending. Not to follow the crowd of course, but rather to do a cross-check and see if there are any promising companies that have been otherwise weeded out by my screens.  

As I scanned a bit further down the list, there were familiar companies like Enterprise Products Partners (NYSE: EPD) at #11 and (with 28 analysts covering it) Rice Midstream Partners (NYSE: RMP) at #12, along with a number of Energy Strategist portfolio recommendations.

Despite the poor overall year-to-date performance of the stocks in the table above, I do see a couple of names that warrant further investigation. (That is also the case as I scan down past the top 10; perhaps 10-20% warrant additional due diligence.)

One of these prospects sits at the top of the list — TransMontaigne Partners (NYSE: TLP). I will take a closer look at this one in this week’s MLP Investing Insider.

Bear in mind that this is not the way I typically go about analyzing companies, but I do like to peel the onion many different ways. Sometimes, this approach can turn up a good company that may have otherwise escaped my standard stock screens, perhaps because it had an off year.

At that point the company becomes a candidate for our Energy Strategist portfolios, which I would share with my colleague Igor Greenwald for a final layer of due diligence. Of course it doesn’t always work in that order. Often it is Igor finding and doing due diligence on a promising company and then passing off to me for a second pass. In any case, the stocks we end up recommending have been evaluated by both of us, which helps reduce the risk that we have overlooked some important factor. That also allows us to evaluate a bigger universe of companies for potential inclusion in the portfolios.    

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)


Portfolio Update

These Liberals Dig Pipelines

Pipeline stocks have rallied sharply off the winter lows, with the Alerian MLP Index up 32% in two months. Kinder Morgan (NYSE: KMI) has rebounded 48% since Jan. 20 to top its share price immediately prior to  December’s dividend cut.

The end to the free fall in energy prices appears to have stemmed the urge to sell pipelines at almost any price, while leaving plenty of financing options for the strongest players still pursuing growth opportunities.

Two of the largest of such projects are pending in Canada, and these looked better after yesterday’s National Post report suggesting that the Liberal government of Justin Trudeau plans to support them over local opposition.

One is Kinder Morgan’s proposed near-trebling of crude volumes on an expanded Trans Mountain pipeline shipping Alberta crude to the coast of British Columbia. The other is TransCanada’s (NYSE: TRP) proposed Energy East pipeline, which would bring Alberta crude east to the refineries in Atlantic Canada.

According to the National Post report, Trudeau’s backing for these pipelines is based on conviction that the projects are essential to the ambitious economic growth targets his government has set.

Energy accounts for a relatively large share of the Canadian economy, so this policy amounts to the pursuit of enlightened self-interest. The pragmatism of Trudeau’s leftist Liberals on this issue is in contrast with the increasingly hostile reception accorded to pipeline proposals in the U.S.

Following the rejection of TransCanada’s Keystone XL expansion by President Obama, other pipeline projects have faced long delays. For example, Kinder Morgan has been forced to halt construction of its Palmetto fuel pipeline after the Georgia legislature passed a one-year moratorium on eminent domain seizures. In the Northeast the long-pending Constitution gas pipeline has now been delayed for another year, until late 2017, as a result of determined local opposition.

Such delays are certainly not good news for the sponsors of the projects in question. But they do serve to underscore the value of the pipelines already in operation, which often cannot be easily replicated at a reasonable cost. The Palmetto, for example, is intended to move refined products from Louisiana into the Southeast, along a route roughly paralleling that of the heavily overbooked Colonial Pipeline.

The Canada news isn’t enough for us to upgrade Conservative Portfolio recommendations KMI and TRP to Buy from Hold, especially in light of their recent gains. For the moment, there is more upside elsewhere.

But it’s encouraging all the same that at least some progressive politicians still view pipelines as vehicles of economic progress.

— Igor Greenwald


Stock Talk

Add New Comments

You must be logged in to post to Stock Talk OR create an account