Crash Helmets On

By Robert Rapier and Igor Greenwald • January 21, 2016 • Issue Articles

In this issue:

It’s been a blood-curdling start to a new year for energy investors, and the pain is far from over given the damage that will continue to be inflicted on producer balance sheets even if crude were to rally 30% from current levels. Don’t fall into the traps of dismissing the market as irrational or failing to protect your capital by refusing to lock in losses. Upstream stocks are down a lot but most are hardly cheap for businesses losing money on sales of a dramatically glutted commodity.

Our new Best Buys list seeks to take advantage of the oil crash by focusing on its likely beneficiaries, including producers of natural gas that’s likely to benefit from crude output cuts as well as the downstream fuel distributors. For now, the rest of our picks are holds, not buys, and some of the few crude producers we haven’t already purged will be sells in short order.

We also remain bullish on midstream MLPs, which have suffered a crash out of all proportion to their exposure to crude oil. Those with capital spending funding gaps are already addressing them with debt sales and private equity placements. Very few should have to resort to distribution cuts. And when investor sentiment does turn, as it will, the sector should see quite a bounce.        

 

Portfolio Update

  • Cabot Oil & Gas (NYSE: COG), EQT (NYSE: EQT), Energy Transfer Equity (NYSE: ETE),  Magellan Midstream Partners (NYSE: MMP), Enterprise Products Partners (NYSE: EPD), Delek Logistics Partners (NYSE: DKL), PBF Logistics Partners (NYSE: PBFX),  Global Partners (NYSE: GLP), AmeriGas (NYSE: APU), Capital Products Partners (NYSE: CPLP) ranked in that order as Best Buys, with new buy limits
  • Other portfolio recommendations rated Hold

 

Commodity Update

Oil prices have taken a sharp dive since our previous issue, as concerns about rising global crude inventories (among other things) have led to broad-based panic selling. Since our previous issue, West Texas Intermediate (WTI) has shed $8.20/bbl, falling to $28.66/bbl. Brent crude fell $8.51 to $28.24/bbl. These are prices that haven’t been seen in 12 years, and frankly prices that we doubted we would ever see again because they are so far below the sustainable price for the world’s crude oil producers. If it’s any consolation (and it probably isn’t) the longer prices remain depressed, the harder they are likely to overshoot to the high side when the inevitable recovery comes. Natural gas remains weak, dropping $0.01/MMBtu since our previous issue to $2.15/MMBtu. But in comparison with the carnage in the crude oil market, natural gas is holding up just fine.

In Other News

  • BP (NYSE: BP) announced plans to cut another 4,000 jobs from its global oil production operations this year
  • ConocoPhillips (NYSE: COP) became the first company to export crude following the repeal of the export ban. It sold the crude to the Dutch trading company Vitol Group, loading the cargo the last week of December at NuStar Energy’s (NYSE: NS) North Beach Terminal in Corpus Christi, Texas
  • ConocoPhillips also announced the first cargo of liquefied natural gas has shipped from the $17 billion Australia Pacific LNG megaproject in Queensland, Australia
  • President Obama suggested in his State of the Union address that royalty rates for producing oil and coal on federal lands should be increased

 

Stock Talk

Comments Guidelines
Kent

Kent

Robert – I am a new subscriber and you list as #7 Best Buy PBFX but it is not listed on any portfolios. Which portfolio should it be listed on.

Thanks,
Kent

Robert Rapier

Robert Rapier

I will double check, but I think it should have gone into the Growth Portfolio. Thanks for calling it to my attention.

Brandon Wooton

Brandon Wooton

Can anybody explain what the hell the following comment from UBS in regards to MLPL means:

“The ‘Acceleration Amount’ will equal (a) the product of (i) the Current Principal Amount and (ii) the Index Factor as of the last Index Business Day in the Acceleration Valuation Period plus (b) the Coupon Amount with respect to the Coupon Valuation Date immediately preceding the Acceleration Date if on the last Index Business Day in the Acceleration Valuation Period the Coupon Ex-Date with respect to such Coupon Amount has not yet occurred, plus (c) the Adjusted Coupon Amount, if any, minus (d) the Accrued Tracking Fee as of the last Index Business Day in the Acceleration Valuation Period, minus (e) the Accrued Financing Charges as of the last Index Business Day in the Acceleration Valuation Period plus (f) the Stub Reference Distribution Amount as of the last Index Business Day in the Acceleration Valuation Period, if any. If the minimum indicative value or intraday index value threshold has been breached, you will receive on the Acceleration Settlement Date only the Acceleration Amount in respect of your investment in the Securities. The “Acceleration Settlement Date” will be the third Business Day following the last Index Business Day of the Acceleration Valuation Period.”

This happens on Feb 1, 2016 if anybody is interested… (P.S. remind me to stay away from the aggressive portfolio)

Igor Greenwald

Igor Greenwald

The MLPL will be redeemed (cashed out) on Feb. 1 based on the fair value as of the close on Jan. 28. The Jan. 27 closing price of 12.95 was marginally above the UBS-provided “current indicative value” of 12.90, which you can always check here: http://etracs.ubs.com/product/detail/index/ussymbol/MLPL (subject to a 15-minute delay.) If the market price stays above the indicative value today, it will make sense to sell and not wait to be cashed out by UBS on Monday.

Robert Fish

Robert Fish

What is your opinion of the 7 to 12 year debt of the mid stream players, especially KMI, SEP, OKS, ETE and ENB?

Igor Greenwald

Igor Greenwald

I don’t track the debt closely enough to be able to make a recommendation on a particular bond. In general, I believe individual investors should not participate directly in the corporate debt market, which is often very opaque and illiquid. I do expect all of the midstream businesses you’ve cited to be around for the long haul. But I’m not sure that their lower-yielding debt is such a bargain now relative to equity with its tax incentives.

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