In this issue:

Three months is a long time to take off from the broad market rally for an industry ramping up expansion plans like no other.

Yet that’s just what’s happened in the energy space since late last year, as investors fret long-term demand and the already apparent rebound in domestic shale drilling.

We expect energy demand to hold up and prices to eventually head higher, which is why we’re sticking with our two preferred super-majors despite disappointing fourth-quarter earnings.

We’re also recommending a high-yielding Eagle Ford MLP set to profit from aggressive spending by its sponsor.

Last but not least, we’re recommending several Marcellus option trades in anticipation of higher natural gas prices and some catch-up gains by these rally laggards.  

Portfolio Update

Sanchez Production Partners (NYSE: SPP) added to Growth Portfolio; buy below $17.

Options Update

• Buy EQT (NYSE: EQT) April $55 calls below $8 and September $55 calls below $10
• Buy CONSOL Energy (NYSE: CNX) July $15 calls below $3.50
• Buy Williams (NYSE: WMB) April $28 calls below $2.50

Commodity Update

Natural gas prices have plummeted since the previous issue, dipping well below the $3/MMBtu level. There is a seemingly strong disconnect in the market, as Platts Analytics Bentek recently forecast that the U.S. natural gas will be undersupplied by the end of October with only 3.4 trillion cubic feet of gas in storage — 12% below last year’s level heading into winter. The markets seem to disagree for now. Natural gas in storage is just about at the midpoint of the five-year average, which is about 10% below where it was a year ago.    

In Other News

• Reuters reports that energy services companies are beginning to hike prices, resulting in the first increase in shale oil breakeven prices in five years

• U.S. shale producer Whiting Petroleum (NYSE: WLL) said it will spend more than $1 billion this year, largely in North Dakota’s Bakken and Colorado’s Niobrara formations

• Billionaire Sam Zell sees huge potential in Oklahoma’s STACK shale play. (I visited STACK late last week and wrote about it yesterday in the Energy Letter)

• Chesapeake Energy (NYSE: CHK), the second-biggest natural gas producer in the U.S., will scale back investments in natural gas in favor of crude oil projects this year  

• ExxonMobil’s (NYSE: XOM) proved oil and gas reserves dropped 19% as the company wrote down 3.5 billion barrels of heavy bitumen at an oil sands project in Canada.