Last week we held the monthly joint web chat for subscribers of The Energy Strategist (TES) and MLP Profits (MLPP). The chat is conducted by Igor Greenwald, who is managing editor for TES and chief investment strategist for MLPP, and myself.  

We got to most of the questions during this session, but there were a few that required an extended answer, or a bit more research. Below I will address remaining energy sector questions from the chat. For answers to some remaining MLP questions from the chat, see this week’s MLP Investing Insider.

Q: WMB has been weak for some time. Do you see a chance for price appreciation?

Williams (NYSE: WMB) maintains a leading gathering position in the fast-growing drilling operations in the US Northeast, gathering and petrochemical assets on the Gulf Coast and in the Gulf of Mexico, a key pipeline linking the Northeast to the Gulf Coast, Mid-Continent gathering, processing and pipeline assets, and some interests in Canada.

WMB currently yields 3.7 percent and the company projects that the dividend will increase 20 percent in each of the next two years. While shares did trade in a narrow range for most of the second half of 2013, their price began to climb in early December and has risen more than 11 percent in the past six weeks, aided by calls for better shareholder returns from hedge fund investors. The stock has returned 13.4 percent since it was recommended in The Energy Strategist on Oct. 9. We believe WMB is ideally positioned for linking the Marcellus and Utica shales with the major eastern US population centers and gas consumption hubs, and hence expect additional price appreciation.

Q: What are your thoughts on Pembina going forward?  

Pembina Pipeline (NYSE: PBA, TSE: PPL) is a Canadian company that owns and operates pipelines that transport crude oil and natural gas liquids produced in Western Canada. Pembina initially operated as an income trust in 1997 when it went public on the Toronto Stock Exchange, but converted to a corporation in 2010. Since the conversion the company has experienced consistent growth and shares currently yield 4.8 percent.

The company is well-positioned for growth as Alberta’s oil production expands, and it shouldn’t have trouble maintaining and slowly growing its dividend over time since the bulk of its business is fee-based — as is the case with most US-based midstream master limited partnerships (MLPs). The company could be a low-risk option for an investor seeking income, with the caveat that Canadian midstream companies don’t enjoy the same tax treatment as an MLP. Thus, long-term performance may lag relative to a similarly-positioned partnership in the US.

Q: What is your opinion on Halcon Resources?

Halcon Resources (NYSE: HK) is an upstream oil and gas producer with operations focused in the Bakken in North Dakota, the Utica in Ohio and Pennsylvania, and in the Eagle Ford in Texas. Over the past two years shares of the company have been on a steady decline, falling 71 percent.



A big knock on Halcon is that it significantly overpaid for its Utica acreage and that its relatively high level of debt will make it difficult to climb out of the hole they dug for themselves. I believe the share price will turn up this year, but I would wait on the sidelines for now as it still seems to be seeking a bottom. With this much downward momentum and bad news, it would be a really speculative play until it is clear that the company has turned the corner. At present, that isn’t the case.

Q: Could you offer any insight/comment on Swift Energy, which seems to be moving towards oil from natgas?

Swift Energy (NYSE: SFY) is an oil and gas producer with operations primarily in Texas and Louisiana. Like Halcon, the company’s share price has been battered over the past two years, down 61 percent, but unlike Halcon, Swift seemed to turn a corner in the second half of 2013. In comparing the two, Swift is in better shape financially (less leveraged and a better cash flow position) and has less downside risk. Swift has done a good job of growing both oil and gas reserves, as well as production in the Eagle Ford.

Swift’s production has grown while the share price has languished. Source: Swift Presentation    

Swift looks like a good value at this level.

Q: Do you expect the recent news of a GLOG spinoff would slow down the growth in GLOG as they split the company into a common stock and an MLP? How much of the anticipated growth would move to the MLP?  

GasLog (NYSE: GLOG) owns 15 LNG carriers, with eight ships on the water and seven more to be delivered by 2016. The company is one that we have liked and recommended, and it performed well in 2013, up 33 percent for the year. It has long been thought that the company might drop down assets into an MLP, but last week’s news that this will indeed be the case helped propel the stock up nearly 20 percent for the week.

GasLog has yet to release details of how the MLP will be structured, but the company obviously believes that the move will unlock value. The MLP assets will probably trade at a premium to GasLog’s recent valuation, but of course GasLog has already made a move up in anticipation of this deal unlocking value for shareholders.

We like GasLog fundamentally, and have covered it in depth in The Energy Strategist. If you already own it, congratulations now that your return is up to 61 percent over the last 12 months. But with recent news driving prices significantly higher, I would be wary of initiating a position at this point.

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

Portfolio Update

Schlumberger Gushing Green

To describe Schlumberger (NYSE: SLB) as merely a well-oiled machine might be doing the leading oilfield services provider an injustice. Better to give the Growth Portfolio Best Buy its full due as one of the best managed companies in the S&P 500.

However it’s lubricated, Schlumberger has become a relentless buzzsaw in recent years, using superior technology and a global footprint that is the envy of its industry to severely prune the ambitions of rivals. Over the last three years it’s taken a lot of market share from the likes of Halliburton (NYSE: HAL), Baker Highes (NYSE: BHI) and Weatherford International (NYSE: WFT), even as it’s continued to fatten its operating margins.

The results announced Thursday continued last year’s streak of reports that somehow managed to deliver above high expectations. Revenue was up 7 percent despite persistent pricing pressure on land operations in North America and a security-related disruption in southern Iraq. But income from continuing operations was up 28 percent, matching the increase in the dividend approved by the board a day earlier, while the operating margin ticked up to 21.9 percent on year-end software sales.

Typically Wall Street analysts want to know whether management is sandbagging forward guidance, or where the warts are in the current set of numbers. Schlumberger’s flock, on the other hand, is more curious about whether there are any more efficiencies to squeeze (there are) and how the company is running so lean in working capital (by collecting promptly on its invoices, in part.)

Management guided for 2014 earnings growth “solidly in the double digits,” while analysts are modeling, on average, a 14 percent increase. This sounds plausible given the company’s expectations for better economic growth and steady oil prices as rising supply offsets increased demand. The oil and gas industry’s capital spending is expected to grow 6 percent, and Schlumberger expects to keep increasing its premium pricing after a gain of 5 percent on that score in 2013, by one internal measure. Add in the probable market share gains and a mid-teens earnings increase seems achievable.

Schlumberger’s own capex is expected to decline slightly this year, further boosting free cash generation that has recently shifted into overdrive. Schlumberger produced free cash flow — that is, the cash profit it didn’t need to reinvest — of approximately $8 billion last year, including $2.5 billion just in the last quarter. Share repurchases ramped up to $1 billion in Q4, and the company also sliced more than $1 billion from its modest net debt while paying out some $400 million in dividends.

Continued strong cash flow growth is highly likely barring a global drilling slump, which does not appear to be in sight. And while Schlumberger’s wide global footprint is a risk, it’s even more of a reward in lessening the company’s reliance on cutthroat competition in North America, while giving it upside to the eventual spread of advanced drilling techniques to places like China and Mexico. And in the meantime the Middle East continues to gush fat contracts.

This core Growth Portfolio holding has returned 20 percent over the last 12 months and still looks like a bargain relative to the quality of the business and its management. Buy SLB below $100.

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