In this issue:

Crude enjoyed its best day in months on Friday, and it would be tempting to conclude that the crash is over and the time right to bargain hunt some shale drilling stocks marked down 50% or more.

We certainly fell into that trap several times last fall, and for the most part were subsequently proven wrong.

The steep discounts from former highs play into investors’ recency bias, which tells us anything down a lot quickly must be cheap. In fact, as we’ve been arguing since before the year began, for many energy stocks the pain will go on long after crude prices stabilize, because even $60 a barrel will require a rally of more than 20%, and oil may not reclaim $70 a barrel this year.

In these dramatically altered circumstances, 50% off might represent a fair discount for a driller facing a big drop in cash flow next year as more hedges expire, or it may not. But we don’t think it’s too late to cut more risk loose from energy portfolios in preparation for more volatility and disappointments.

The half-priced driller with half its cash flow gone might in fact be less of a bargain than a midstream master limited partnership trading at 20% off but with almost all of its cash flow intact and protected for several years.

This is why we’re revisiting the case for midstream MLPs in general this week and will be going over some of our favorites in the next issue.

Risk-tolerant energy speculators seeking capital appreciation might be better off bottom-fishing among tanker stocks rather than onetime shale champions. Unlike the drillers, tanker fleet operators tend to do better when crude prices are low enough to stimulate demand and trade. The deep contango in crude futures, with its built in expectation for a gradual rebound in oil prices, also favors tankers as convenient offshore storage vessels. We’ve got three new picks for surfing the rising tide of charter rates, including one still offering a double-digit yield after today’s double-digit gain.

But we’re also serious about our recent resolution to control portfolio sprawl and to lower our exposure to drillers we expect to struggle and to other speculative picks made under very different circumstances. There’s nothing wrong with the six stocks we’re dropping that wouldn’t be fixed or overlooked given much higher energy prices, which unfortunately are not in the cards at the moment. In fact, given the sector’s cyclical nature there are pretty good odds that many of these will eventually trade significantly higher. But that doesn’t really help anyone curb near-term risks, nor does waiting to be bailed out by the next upturn help us present portfolios suitable for the current environment. We think the tanker stocks are a better bet in 2015, and don’t wish to recommend more investments than we can stay on top of.

Despite what oil did today, this is a time for caution and patience, not for venturing out on a limb simply because something’s much cheaper than it was in September.    

 Portfolio Update

• Cameco (NYSE: CCJ) sold from Aggressive Portfolio
• Denison Mines (NYSE: DNN) sold from Aggressive Portfolio
• Chicago Bridge & Iron (NYSE: CBI) sold from Growth Portfolio
• Dresser-Rand (NYSE: DRC) sold from Growth Portfolio
• Penn Virginia (NYSE: PVA) sold from Growth Portfolio
• Suncor Energy (NYSE: SU) sold from Growth Portfolio
• Capital Products Partners (NASDAQ: CPLP) added to Aggressive Portfolio; buy below $10
• Frontline (NYSE: FRO) added to Aggressive Portfolio; buy below $3
• Teekay Tankers (NYSE: TNK) added to Aggressive Portfolio; buy below $6

Commodity Update

The plunge in crude oil prices has slowed, with Brent crude actually gaining ground over the past two weeks. West Texas Intermediate (WTI) traded below $45 per barrel (bbl), but on Friday jumped up 7% to $47.67, down $0.79/bbl from our previous issue. Brent gained $2.39 over the past two weeks to $52.38/bbl. Natural gas rallied briefly as a blizzard closed in on the Northeast, but building inventories continue to weigh down natural gas prices, which are currently at $2.67/MMBtu, down $0.36/MMBtu since our last issue. I think we are very near the bottom of crude oil prices for this cycle (recall that I predicted we would not go below $40/bbl), but if the winter continues to be warm then natural gas prices may have further to fall. It is very possible that we see them briefly drop below $2.00/MMBtu as we did in the Spring of 2012.

In Other News 

• President Obama visited Saudi Arabia to offer condolences to the family of King Abdullah, who died last week. The late king of the oil superpower reigned for 10 years, and was succeeded by his half-brother Salman bin Abdulaziz Al Saud.

• Low natural gas prices are spurring a resurgence in the U.S. chemical industry. This week Methanex (NASDAQ: MEOH) announced production of the first batch of methanol from its new 1 million ton per year plant in Louisiana, which was relocated from Chile. Natural gas is the primary input in methanol production.

• The price of crude oil briefly rebounded after OPEC Secretary General Abdalla El-Badri said insufficient investment could push oil prices to $200/bbl.

• Shares of Petrobras (NYSE: PBR) plummeted after the company released long-delayed Q3 results but failed to include an expected writedown addressing the corruption charges at the company. Over the past three years PBR has lost nearly 80% of its market cap.

• Caterpillar (NYSE: CAT) posted disappointed earnings and lowered guidance, citing low oil prices that have led to reduced orders for oilfield equipment.

• For the first time in four months, the steady decline of gasoline was interrupted as prices edged up slightly this week.