In this issue:

Two years ago we predicted that U.S, shale drillers would outlast the price war launched by OPEC, simply because they had much more room to cut costs and were likely to be much quicker about it. That’s how things have played out so far.

But there is no way we could have guessed that the priciest drilling rights in the Permian Basin would be fetching more than $50,000 per acre by now. Those prices are based in part on the steep cuts in operating costs, and in part on new drilling targets and fracturing techniques that have dramatically improved the early output from new horizontal oil wells.

But there’s also a third factor that’s likely more important than  the other two: the willingness of investors to bid shale drillers’ shares to new highs, providing additional capital for acquisitions and drilling. Higher share prices will eventually translate into higher output, increasing costs and largely disappointing returns. But it’s hard to resist the urge to dance while the music’s playing, as our overview of recent Permian deals suggests.

Money’s flowing back back into the midstream sector too: the Alerian MLP Index is up 7.5% on a total return basis year-to-date. But many of the general partners still smarting from last year’s crash aren’t willing to bet that the good times will roll on, it seems. More of them are cashing out the lopsided fee schemes known as incentive distribution rights in order to bring down the cost of capital. But there are other motivating factors as well, and we much prefer the clear and direct route Williams (NYSE: WMB) chose over Marathon Petroleum’s (NYSE: MPC) trickier path.

As should be obvious by now, we also much prefer the fee-based midstream businesses offering annual returns of 10% and up over the producers’ treadmill of paying up for costly drilling rights only to face rising service costs and the risk of continued oversupply.

But higher energy prices are on the horizon based on diminished output and investment overseas, and their arrival should lift most boats. We’ll continue recommending those best placed to realize that upside without capsizing.

Commodity Update

Oil prices seem to have found some stability in the low to mid-50s, as investors continue to watch the dynamic between the cuts made by OPEC members, and the increase in production by U.S. shale producers. At present the cuts exceed the production increase, but investors remain skeptical for now. If it becomes clear that global inventories are coming down, expect oil prices to push on up to the $60/bbl level. Natural gas prices have weakened with the end of winter in sight, briefly dipping back below the $3/MMBtu level for the first time this winter.   

In Other News

• Shares of Growth Portfolio recommendation Cabot Oil and Gas (NYSE: COG) surged 10% after two firms upgraded the company on news that the Federal Energy Regulatory Commission (FERC) approved the Atlantic Sunrise pipeline that will carry Cabot’s gas

• BP (NYSE: BP) reported earnings that missed Wall Street expectations, and raised its breakeven oil price to $60/barrel

• Wood Mackenzie’s latest projections of breakeven oil prices for new wells in North America’s shale basins indicate that many regions are profitable at $60/bbl

• Phillips 66 (NYSE: PSX) CEO Greg Garland warned that President Donald Trump’s proposed border tax on imports would increase gasoline prices by up to 40 cents per gallon as US refiners pass the extra expense on to consumers

• The Army Corps of Engineers announced it will grant Energy Transfer Partners (NYSE: ETP) the final easement necessary for the completion of the Dakota Access pipeline.