The Best Ideas Newsletter portfolio has generated significant outperformance in part from avoiding many of the landmines across the energy sector during the past many months. We’ve done equally well in our calls in the Dividend Growth Newsletter portfolio, and we’re very proud of raising the issue of the importance of looking at non-GAAP free cash flow across pipeline entities. We believe that such a measure is the best one to assess the timing of free cash flows as they are generated, an important consideration for investors of all types, and not properly addressed in measures of distributable cash flow or a company’s dividend or distribution.
Why are we now inching ever so slightly back into energy?
1. The market is finally telling us to. We’ve now encountered one of the strongest technical moves that can happen with a given security, and we’d be fools not to admit that a strong breakout of a defined downward trend on high volume hasn’t happened. It has, fulfilling a key aspect of the momentum requirement behind our research and analytical process. We are wise enough to not bet against the market when it so desperately wants to change course.
2. We’re getting preliminary fundamental affirmation that the cause of much of crude oil’s malaise may be starting to alleviate, at least as it relates to the news hitting the wires today. High-level comments by OPEC secretary-general Abdulla Salem el-Badri that “there will be ‘less supply in the very near future,’” suggests that a foundation is being built on which crude oil prices may get a much-needed bounce. According to the news report, OPEC investments in oil and gas projects are being scaled back, and while we can’t know for sure if this is just posturing to prop up the crude-oil markets, it may not matter. That crude oil prices have risen to the high-$40s/low-$50s will ease at least some of the pain of many in the industry. The bounce may offer a short-enough reprieve, even if in the long run, crude oil prices end up materially lower.
3. We’re doing so from a portfolio allocation standpoint. We’ve generated a significant amount of alpha across the energy sector in both newsletter portfolios, and we’re now moving closer to a market-neutral stance, similar in some respects to how we did so in our rating assessment when Kinder Morgan (KMI) collapsed to our fair value estimate. We’re establishing a 5% weighting in the Energy Select SPDR ETF (XLE) in the Best Ideas Newsletter portfolio at $67.14 per share and adding to the weighting of the ETF in the Dividend Growth Newsletter portfolio such that it, too, represents 5% of the portfolio. This is primarily a decision made in the context of the allocation of the newsletter portfolios, not one that should be interpreted as our taking a home-run swing on the energy space.
Though we’re not saying to do as much, nor can we, as we can never give any buy or sell advice at any time, but the market is now fully behind the energy complex in a big way, and the equity market activity coupled with recent actions by the rating agencies may continue to propel the “debt-infused” distribution bubble across the midstream space and master limited partnerships (MLPs), in particular, for some time to come, irrespective of how we think they should be valued, and irrespective of right or wrong.
Let it be known, however, that the market price on Kinder Morgan at the time of this writing is $31.70, and if members want to jump back in for the company’s dividend, it has always been their call. The market simply wants this debt bubble to keep going. In any case, we’ve saved members as much as 25% of their capital or maybe more, by warning about the collapse that did happen from $40 per share.
We’re not embarrassed for being right about our calls in energy, but we would feel extremely embarrassed if Kinder Morgan’s shares did surpass $40, and we didn’t make it known today that this possibility is becoming increasingly more likely as investors factor in the growing likelihood that a rate hike may be pushed back to 2016 (or later). We hold dear the very idea that we can tell you what we really think, absolutely free of any bias. Kinder Morgan is included as a top-5 weighting in the Energy Select SPDR ETF.
For new members coming in “midstream,” this may seem wishy-washy, but sometimes marketwide recognition of our alpha-generating capacity comes at a time when we, too, must pivot. Good calls must be locked in, leaving little to doubt.
Oil & Gas – Major: BP, COP, CVX, PTR, RDS, TOT, XOM
Pipelines – Oil & Gas: BPL, BWP, DPM, ENB, EPD, ETP, EVEP, HEP, KMI, MMP, NS, PAA, SE, SEP, WES, WMB
Refiners: HES, HFC, INT, MPC, MUR, MUSA, NTI, PSX, SZYM, TSO, VLO
Energy Equipment & Services (Large): BHI, CAM, FTI, HAL, NBR, NOV, SLB, TS, WFT
Energy Equipment & Services: CLB, DRQ, FI, HLX, HP, OII, OIS, PDS, PTEN, SPN, TDW
Energy Equipment & Services – Offshore Drilling: ATW, DO, ESV, NE, RDC, RIG, SDRL