As I have done for several years now, I like to close out the year by highlighting the top stories in the energy sector.

The 2015 list was challenging, because so many of the stories are interrelated. Commodity prices continued to plummet, but oil, natural gas, and coal prices fell for somewhat different reasons. This of course resulted in the lowest gasoline prices in years, which was itself a big story.

A crude oil export ban that I believed would stick around for years is on the cusp of repeal, yet it’s part of a spending bill that would also extend tax credits for renewable energy. So is the story the spending bill, or its particular provisions? These were the challenges I had to sort out.  

The rankings are somewhat arbitrary. This year there wasn’t an energy news event as dramatic as the Deepwater Horizon oil spill of 2010, or the Fukushima Daiichi nuclear disaster of 2011. Here is the list I settled on.          

1. The oil plunge continues

My top energy story of 2014 was the price collapse that took West Texas Intermediate from more than $100 per barrel at the end of July to just over $50/bbl by the end of the year. This year saw a brief recovery above $60/bbl, but production increases in the Mideast, combined with a slower-than-expected decline in U.S. shale oil output, led to rising crude inventories worldwide. This continued to put downward pressure on the price, which is now closing out 2015 in the $30s.

The reason this is the top story is that it was a major story all year long, with impacts on so many people and countries. It has been said that OPEC’s decision to defend its market share cost members of the oil exporters’ club $500 billion in 2015. That $500 billion ended up in the pockets of consumers by way of lower gasoline prices, cheaper airline tickets, etc.   

2. Climate agreement in Paris

This was the other main contender for the top energy story of the year. The 2015 United Nations Climate Change Conference was held in Paris during the first half of December. The summit culminated in a global agreement on combating climate change, reached by consensus among representatives of the 196 parties attending the conference. The agreement is a pretty big deal, but it isn’t yet legally binding. There aren’t any penalties for countries that miss their emissions targets. Further, the agreed-upon emission targets aren’t enough to put the world on a path to meet the long-term temperature goal specified.

The agreement may ultimately have a huge impact on the trajectory of carbon dioxide emissions, but a lot still has to happen to make it so. That’s why this deal — as big as it is potentially — wasn’t the top story of the year.   

3. Crude export ban repeal

The U.S. has had a crude oil export ban in place since 1975, one of a number of measures passed at the time to mitigate future oil crises. The ban makes it difficult to export crude oil to countries other than Canada. Over the years, the restriction hasn’t been much of an issue since the U.S. still imports lots of crude oil. But as a result of the shale oil boom, net U.S. imports of crude oil and finished products have been falling since 2006, and are now at around 5 million barrels per day (bpd) — below the rate in 1975 when the crude oil ban was enacted.

Crude oil producers and politicians in major oil-producing states have been lobbying for an end to the export ban to improve market access and pricing for domestic producers. U.S. Energy Secretary Ernest Moniz said at one point that the ban should be revisited. Senate and House bills to do just that were introduced, but the Obama Administration opposed the repeal, citing the potential for higher U.S. gasoline prices.

Congress included the repeal of the ban in a $1.8 trillion year-end appropriations bill that also extended tax breaks for wind and solar power. Both parties walked away with major wins from the legislation, and President Obama — despite his previous opposition — signed the bill into law. Thus, the crude export ban has ended after 40 years.   

4. Renewable tax credits extended

The same spending bill that repealed the crude export ban also extended certain credits for renewable power producers. The Production Tax Credit (PTC) saves producers 2.3 cents per kilowatt-hour (¢/kWh) of electricity produced from wind, geothermal and closed-loop biomass systems, and 1.1 ¢/kWh for other eligible technologies (typically through the first 10 years of operation.) The solar Investment Tax Credit (ITC) is a 30% federal tax credit for solar system investments on residential and commercial properties that had been set to expire at the end of 2016.

The new law extends the PTC through 2016 and then phases it out gradually until it fully expires in 2020. The ITC has now been extended through 2023, and will be phased out gradually starting in 2019. This approach — extension of the tax credits combined with a phaseout — is one I have suggested before. It gives renewable power producers a predictable subsidy but puts them on notice that they can’t count on such breaks over the long haul.

5. Crude production continues to expand

Despite the collapse in crude oil prices, the U.S. shale boom continued to bring additional supply into a glutted market. Crude oil production in the U.S. hit a peak of 9.6 million bpd in April, the highest level since 1972. It’s a pretty safe bet that had crude oil prices not collapsed, the U.S. would have eclipsed the previous monthly production record of 10 million bpd set in October 1970. But drilling rigs are being rapidly idled and crude oil producers have slashed budgets. As a result U.S. shale oil production has begun to decline, and will end the year at about 9.1 million bpd. Nevertheless, monthly output has shown year-over-year growth every month this year, so 2015 will likely deliver an increase in U.S. crude oil production for the seventh straight year. Look for that streak to be broken in 2016.   

Beyond the top five, here were some of 2015’s other important energy stories:

• 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 finally released its Renewable Fuel Standard (RFS) blending rates for various biofuels, covering mandated volumes for 2014, 2015 and 2016

• Following years of delays, the Obama Administration formally rejected the Keystone XL pipeline on the grounds that it wouldn’t serve U.S. national interests

• China, by far the world’s largest coal consumer, admitted it has been burning up to 17% more coal than previously reported

• Gasoline prices fell to a six-year low, providing a windfall of nearly $200 billion for consumers versus what they spent on gas just two years ago

• Natural gas supplanted coal as the leading fuel source for U.S. power plants for the first time ever  

• Despite billions of dollars in private and government spending — and 58 million gallons of nameplate capacity at POET, Abengoa and INEOS — only 2 million gallons of cellulosic ethanol had been produced through November

• Natural gas inventories reached the 4 trillion cubic feet mark for the first time, pushing natural gas prices below $2/MMBtu

Next week in The Energy Strategist I will discuss the implications of the new legislation. And check this space next week as I grade my 2015 predictions for what turned into a very challenging year in the energy sector.

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

Portfolio Update

Filling Up on Global  

Things have certainly rolled downhill fast for MLPs which have traded for the past six weeks especially as if the entire U.S. oil and gas gathering, processing and distribution system might vanish at any moment, leaving consumers to look after their energy needs Mad Max style.

Even in this tape, November and December have so far been particularly bleak for Global Partners (NYSE: GLP), which has lost 52% of its market value over that span.

Global is mostly a gasoline distributor to its network of 1,530 affiliated East Coast filling stations these days. This business is booming as cheap fuel encourages more driving and more snacks bought at convenience stores next to the pumps; it will continue to generate plump and predictable profits so long as gasoline stays reasonably inexpensive.     

But Global has also gotten into the Bakken crude-by-rail logistics business, which at current oil prices and differentials has lost much of its economic rationale. This sideline isn’t going to disappear next month: a key contract to bring Bakken crude to Albany, NY by train and then by barge to East Coast refineries has two more years to run, for starters. But right now the modest ongoing investments to ship more Bakken crude to the West Coast and the Gulf of Mexico look like a waste, and certainly a distraction to investors.

The gasoline distribution and station operations, which have expanded dramatically following recent acquisitions of two complementary station networks, accounted for 77% of Global’s margin in the most recent quarter. Wholesale crude and fuel sales to refineries and dealers made up another 20% of total segment margin and, and their profitability was down 58% year-over-year following the loss of a big gasoline account and as a result of a margin-sapping fuel glut.

In mid-November, with GLP units still fetching $26, these negatives and the resulting slowing distribution growth prompted us to downgrade GLP to Hold.

Now that they’re down to less than $16, it’s time to focus on the many positives. The distribution backed by steady filling station profits is secure, with coverage recently  declining to a more than respectable 1.25x, from a cumulative 1.5x or so over the last decade. Though the recent station acquisitions have significantly expanded both the debt and the equity float, leverage remains reasonable at a debt/EBITDA ratio of 3.9 (though that rises to nearly 5 if you factor in a working capital facility.)

Crucially, capital spending needs are modest and deferrable. That’s a good thing, because Global is effectively barred from raising more equity at the moment by its units’ current yield of 17.8%.

Cash flow from filling station operations would support a double-digit yield even if gasoline demand fades some and yet the wholesale margins don’t recover. And that makes Global an excellent portfolio stash at the current price, the more so since it doesn’t need higher crude prices to continue delivering reliable income.

The near-term results in the wholesale will be hurt by the recent warmth, but should be offset somewhat by higher gasoline sales. And weather quirks aside, the push to bulk up that side of the business now looks farsighted.  

Growth pick GLP is a Buy again below $21.         

     — Igor Greenwald