In this issue

After a slump into the 20s and a brief peek above $50 per barrel, West Texas Intermediate is right back where it was a year ago, in the low to mid-40s. Meanwhile, S&P 500 energy stocks are collectively up 9% in the same span.

They’d be up a lot more without the severe drag from the refining contingent. Longtime Growth Portfolio recommendation EOG Resources (NYSE: EOG) is up 20% in the last year; Continental Resources (NYSE: CLR) has (re)gained 60% over the span.

Heck, fuddy-duddy Apache (NYSE: APA), added to the Growth basket just last month, rallied 14% in two days earlier this month on the strength of its claimed major Permian find, which garnered a ton of publicity. That’s $2.8 billion in market cap added based on a big reserves estimate derived from limited production data from a handful of wells, in a remote area that will require a lot of infrastructure to reach its potential.

Even as Apache was touting its Alpine High discovery,  EOG announced the buyout of a neighboring private Permian driller for $2.5 billion. Its stock jumped 7% the day.

We’re not calling those price moves unjustified, or implying that oil shares should track crude. The Permian remains a rich if pricey resource, as our survey of this top oil play suggests below. And companies like Apache and EOG have dramatically cut costs over the last year while improving the productivity of their drilling techniques, proving that they can survive a protracted slump.

But it would be folly not to notice investors’ eagerness to trust that any cash dropped onto the Permian’s rich rocks will ultimately deliver a big payoff. Despite the sharply lower oil prices, you can pick up unmistakable echoes of the last shale boom in the capital markets these days. And one needn’t expect another crash to remain skeptical about how well this evident enthusiasm will be rewarded in the short run,

Pipeline stocks have also rallied a lot from the wintertime panic lows. Some of the resulting froth has been skimmed off in recent weeks, coinciding with high-profile protests of an oil pipeline.

Such opposition has delayed or killed a number of pipeline projects in recent years, and there’s no reason to expect a trend change any time soon. But it’s just as important to recognize that we’re still in the midst of an energy infrastructure building boom to meet the needs of those ever more productive shale drillers, as well as power plants and fuel refineries.

We believe the difficulty of developing new pipeline routes favors incumbents in general and a particular type of midstream provider. This issue includes an analysis of the pipelines’ political problems and their implications for investors.

The fundamentals of the midstream sector still look solid, and we’re using the recent pullback to upgrade one of the sector’s best long-term growth stories, albeit one that’s lagged the sector of late. Its recent news is part of this issue’s portfolio update.  

Energy Strategist Portfolio Update

• Sunoco Logistics Partners (NYSE: SXL) upgraded to a Buy below $33 in Conservative Portfolio

Commodity Update

Natural gas prices and oil prices have been headed different directions over the past month. Oil has slipped toward $40, while natural gas crossed the $3/MMBtu threshold for the first time in nearly a year and a half. (Note that we recently recommended liquidating a speculative stake in a leveraged natural gas ETF for a gain of approximately 30% in the course of a month.) The weakness in oil prices is primarily a result of the continued overhang in crude oil inventories and a modest downgrade in demand growth expectations by the International Energy Agency. (I addressed the latter issue in a recent Forbes article.)

In Other News

• The United States and China, the world’s two largest carbon dioxide producers, formally ratified the Paris agreement to curb greenhouse gas emissions

• Following a major earthquake in Oklahoma, state regulators ordered oil and gas companies to shut down all wastewater disposal wells near the quake’s epicenter

• Canada’s Enbridge (NYSE: ENB) announced a deal to buy Spectra Energy (NYSE: SE) in a $28 billion equity swap that will to create the largest North American energy infrastructure company

• Wood Mackenzie reports that only 2.7 billion barrels of new oil supply was discovered in 2015, the smallest annual increment in 70 years

• Apache (NYSE: APA) announced a major new oil and gas discovery in the Permian Basin

• After a federal judge ruled against the Standing Rock Sioux and declined to halt construction of a $3.8 billion pipeline being built by Energy Transfer Partners (NYSE: ETP), the Obama Administration intervened and halted nearby construction pending further review

• Noble Midstream Partners (NYSE: NBLX) became the first MLP  to make its market debut this year, after a popular initial public offering. Its units opened 17.5% above a higher-than-expected IPO price.