In this issue:

You may have heard: times are tough in the oil patch, the gas patch and all the energy patches in between. Drillers who spent much more than they made when crude fetched $100 a barrel are trying to live within their much reduced means now that it’s only worth $40.

What all the dire headlines miss is that the energy sector continues to earn billions in profits. It’s just that these are going to the pipeline operators, the refiners and even some of the big oilfield services suppliers. And while the earnings are not guaranteed to last if oil and gas prices stay low for years, that’s a fairly remote risk given the currently brisk global demand and supply that’s about to be curbed by deep capital spending cuts.

We prefer hard numbers to carefully hedged forecasts and actionable ideas to vague happy talk. So this issue ranks companies in several key energy subsectors by the free cash flow they’re generating to identify those best-placed to weather this downturn.

These companies are effectively running budget surpluses, in stark contrast to the unsustainable fiscal deficits plaguing much of OPEC. As long as they don’t overspend, time remains on their side in the price war among the global energy producers.

The same holds true of the midstream sector that continues to deliver distribution growth fully covered by cash flow and backed by the huge and growing U.S. energy demand. The market is treating most MLPs as radioactive even though they continue to deliver the goods. We hope the updates based on the recently reported results give you the confidence to exploit that opportunity.

Don’t be misled by the wholesale lowering of buy limits, which simply acknowledges current realities. Demand and production trends suggest a lot of upside for energy prices next year. We’re growing increasingly optimistic.

Portfolio Update

• Capital Products Partners (NASDAQ: CPLP) upgraded to Buy below $7 in Aggressive Portfolio
• Global Partners (NYSE: GLP) downgraded to Hold in Growth Portfolio
• SemGroup (NYSE: SEMG) upgraded to Buy below $45 in Growth Portfolio
• UBS E-TRACS 2x Monthly Leveraged Long Alerian MLP Index (NYSE: MLPL) downgraded to Hold in Aggressive Portfolio
• Delek Logistics Partners (NYSE: DKL) buy limit reduced to $40 in Conservative Portfolio
• Energy Transfer Partners (NYSE: ETP) buy limit reduced to $48 in Conservative Portfolio
• Enterprise Products Partners (NYSE: EPD) buy limit reduced to $34 in Conservative Portfolio
• EQT (NYSE: EQT) buy limit reduced to $85 in Growth Portfolio
• EQT GP Holdings (NYSE: EQGP) buy limit reduced to $29 in Aggressive Portfolio
• NuStar Energy (NYSE: NS) buy limit reduced to $46 in Growth Portfolio
• NuStar GP Holdings (NYSE: NSH) buy limit reduced to $27 in Growth Portfolio
• Spectra Energy (NYSE: SE) buy limit reduced to $32 in Conservative Portfolio
• Sunoco Logistics Partners (NYSE: SXL) buy limit reduced to $36 in Conservative Portfolio
• Targa Resources (NYSE: TRGP) buy limit reduced to $50 in Growth Portfolio

Commodity Update

All eyes are on OPEC, as crude continues to test the $40/bbl support mark. Since our previous issue, West Texas Intermediate (WTI) slid $0.19/bbl to $41.38/bbl. Brent crude rose $0.08 to $44.20/bbl. Record natural gas inventories continue to hang ominously over that market, with natural gas losing another $0.06/MMBtu since our previous issue to $2.23/MMBtu.

In Other News

• The U.S. Energy Information Administration announced that natural gas inventories have reached the 4 trillion cubic feet mark for the first time

• A group of 30 analysts polled by Bloomberg predicted that OPEC would opt to continue the price war it started a year ago at the group’s Dec. 4 meeting

• Oil prices hit two-week highs after Turkey shot down a Russian bomber

• Noble Midstream Partners postponed its initial public offering, citing adverse market conditions

• One of the largest renewable energy companies in the world, Spain’s Abengoa (NASDAQ: ABGB), sought protection from creditors after an investment firm backed out of a plan to inject capital into the company

• The Environmental Protection Agency set the 2016 biofuel blending quotas for the nation’s gasoline supply above what it  proposed in May. Refining stocks sagged on the news, while biofuel investors cheered.