In this issue:

You can’t value drillers based solely on projected earnings or recent output. After all, a dollar of expected profits for a driller that’s nearly exhausted its reserves and won’t be earning many dollars in the future ought to be worth far less than a dollar of future profits from a company that’s in position to keep drilling and pumping for years to come.

That’s why the annual estimates of proved oil & gas reserves required by the Securities and Exchange Commission can provide important insights into relative value. This is especially true because the SEC mandates a standardized methodology for valuing those reserves, in an industry with a long history of creatively dressing up its numbers.

Our first look at the recently disclosed data for 2014 highlights the relative value of the few large-cap drillers we’ve long recommended. It also suggests a couple of other candidates for further research.

We remain more enthused about the current opportunities in the midstream sector, which is far less exposed to short-term swings in commodity prices than the drillers, and far more leveraged to growing domestic energy demand. This week’s two picks in this space are longtime recommendations of our sister publication MLP Profits, so we’ve had the benefit of closely following their progress over time. And it’s hard not to like what we see.

In contrast, barring a massive rally in crude prices in defiance of the current market fundamentals, it’s hard to spot much near-term upside for the two past recommendations we’re dropping from our portfolios this week.

Whiting Petroleum (NYSE: WLL) is now now up 17% from its lows after the big surprise secondary offering two weeks ago, which diluted shareholders by 21%. After failing to sell the company in rumored deal talks, management further capped the upside by issuing $1 billion in convertible notes.

Despite the dilution, the share price is now higher than it was in early March before the sales talks rumors surfaced. If crude doesn’t keep rising, those gains will be at risk.

Helmerich & Payne (NYSE: HP) has weathered the crude slump surprisingly well to this point considering it’s the leading supplier of land-based drilling rigs. That’s likely because it has the most advanced technology and the newest fleet in the business. But barring a major oil comeback H&P faces a long slog as numerous competitors and struggling customers attempt to undercut its prices. This is a well-run company that simply finds itself in a hostile macro environment; we would be tempted to get back in at a significantly lower price point.  

Portfolio Update

• Magellan Midstream Partners (NYSE: MMP) added to Conservative Portfolio. Buy below $90

• UGI (NYSE: UGI) added to Conservative Portfolio. Buy below $45

• Whiting Petroleum (NYSE: WLL) dropped from Growth Portfolio

• Helmerich & Payne (NYSE: HP) dropped from Growth Portfolio

Commodity Update

An unusual situation happened this week with respect to crude oil inventories. As I have been pointing out, refinery utilization has picked back up, and is now more than offsetting the gains in U.S. production. For the week ending April 3, U.S. oil production crept forward by only 18,000 barrels per day (bpd), while U.S. refinery inputs surged by 201,000 bpd. This should have dropped crude oil inventories by more than a million barrels for the week. Instead, there was also a surge of crude oil imports (for reasons not yet clear to me) of 869,000 bpd, which meant inventories once more increased for the week. However, at the important storage hub of Cushing, the inventory build was only 1.3 million barrels, about half of the average weekly value over the past month.

Despite the continued build in inventories, analysts and traders are beginning to conclude what I have argued here: storage tanks are not going to fill completely up. As a result (and despite the tentative nuclear deal with Iran), the price of West Texas Intermediate (WTI) reached a 2015 high of $54 per barrel (bbl) before pulling back 4% following the release of the latest inventory report.

At present WTI is at $50.74/bbl, up $2/bbl since our previous issue. Since mid-March the price of WTI has risen by 15.5%. Expectations that Iran will soon be putting crude back on the global market weighed more on the price of Brent, but it still gained $0.69/bbl to $56.83/bbl. Natural gas prices continue to show weakness, trading down a nickel to $2.54 per million British thermal units.

In Other News

• At least four people were killed and 16 injured when a fire erupted on an oil platform owned by Mexico’s PEMEX

• The Energy Information Administration reported that last year’s oil production growth in the U.S. was the highest in at least 100 years  

• Iran has agreed in principle to a deal over its nuclear program, moving a step closer to restoring oil production that has been curtailed as a result of sanctions

• Last week the Energy Information Administration (EIA) reported the first weekly crude oil production decline since January

• TransCanada (NYSE: TRP) announced a delay in its Energy East pipeline project, scrapping a planned terminal in Quebec because of potential harm to beluga whales in the area    

• A new report from the United Nations Environment Program indicated that 2014 saw record investment in global renewable energy

• Royal Dutch Shell (NYSE: RDS.A) announced a $70 billion acquisition of Britain’s BG Group (London: BG; OTC: BRGYY) that will make Shell the the biggest global producer of liquefied natural gas