In this issue:

Greg Armstrong is the CEO and 34-year veteran of Plains All American Pipeline (NYSE: PAA), the master limited partnership he helped turn into the country’s premier crude gatherer and shipper.

Moreover, he remains a steadfast bull on the long-term outlook for North American shale, viewing it as a resource the world ultimately won’t be able to do without, even as the cost of exploiting it grows cheaper.

So it’s notable that Armstrong is, as we are, quite concerned about the risk of another downdraft in crude prices, and for similar reasons.

Simply put, U.S. continues to produce more crude than it can realistically process, and the daily surplus of hundreds of thousands barrels a day has just about used up all the spare storage capacity on the Gulf coast and in mid-continent.

“Over the near term…we believe the environment is going to be challenging, and with the exception of a few head-fakes, could get worse before it gets better,” Armstrong told analysts on the quarterly conference call earlier this month.  “The major consideration in our outlook is the very high inventory levels that have built up and will need to be processed domestically as just one of the many steps necessary to restore balance to the market.”  (The call transcript and related presentation are worth the time of every energy investor.)

The same persistent inventory and production glut convinced us earlier this year to emphasize midstream and downstream investments, with favorable results to this point.

But if another reversal in crude is indeed coming, we could get another shot at bargains among drillers. That’s why we’re so excited to start test driving a powerful screening tool that will help us find them.

The biggest energy merger announced last week was of the intramural variety in the midstream space, and we discuss why it made sense for Williams (NYSE: WMB) to swallow Williams Partners (NYSE: WPZ) and why Energy Transfer Equity (NYSE: ETE) probably isn’t ready to follow suit just yet.

We are ready to lift ETE’s buy limit, however, after a 20% gain year-to-date. We’ve done this repeatedly over the last 14 months, and as a result the subscribers who acted on our original recommendation were not the only ones to benefit from ETE’s 57% return over that span. We think there’s much more in the tank as the general partner uses its decision-making prerogatives and incentive distribution rights to capture most of the benefit from growth at affiliated MLPs.

We’re also taking the opportunity to upgrade several more midstream energy processors and shippers. In contrast, fracking sand supplier Hi-Crush Partners (NYSE: HCLP) has been forced to renegotiate some of its take-or-pay contracts amid the drilling slump, and now looks much riskier than it seemed when we recommended it. We’re downgrading it to a Hold pending a turnaround in oil prices, drilling activity and sand demand.

Portfolio Update   

• Hi-Crush Partners (NYSE: HCLP) downgraded to Hold in Aggressive Portfolio

• MarkWest Energy Partners (NYSE: MWE) upgraded to a Buy below $77 in Conservative Portfolio

• Sunoco Logistics Partners (NYSE: SXL) upgraded to a Buy below $55 in Conservative Portfolio

• Delek Logistics (NYSE: DKL) buy limit raised to $52 in Growth Portfolio

• Energy Transfer Equity (NYSE: ETE) buy limit raised to $75 in Growth Portfolio

Commodity Update

West Texas Intermediate (WTI) broke above $60/bbl before pulling back slightly. WTI is currently at $59.87/bbl, up $2.72/bbl since our previous issue. Brent crude rose another $1.63/bbl over the past two weeks to $66.94/bbl. Natural gas prices advanced strongly, breaking above $3 per million British thermal units (MMBtu) for the first time in more than two months. Natural gas is currently trading at $3.01 per MMBtu, up $0.48/MMBtu over the last two weeks as the weekly increase in inventories was lower than expected.

In Other News

• Tesla Motors  (NASDAQ: TSLA) announced the Powerwall home battery, a rechargeable lithium-ion battery for homes, businesses, and utilities  

• A BNSF Railway crude oil train derailed and caught fire in North Dakota, adding to a string of recent similar incidents

• Noble Energy (NYSE: NBL) and Rosetta Resources (NASDAQ: ROSE) announced that Noble will acquire Rosetta in an all-stock transaction valued at $2.1 billion

• The Energy Information Administration (EIA) forecasts that oil production from seven major U.S. shale plays will decline by 57,000 barrels a day in May and another 86,000 barrels a day in June

• The Interior Department’s Bureau of Ocean Energy Management (BOEM) has approved plans by Shell (NYSE: RDS-A) to begin drilling in the Arctic this summer.