CHK

This MLP’s Distribution Is At Serious Risk

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A version of this article was originally published on November 16. The Keystone XL pipeline has been perhaps the most talked about issue surrounding midstream operators in recent years. The rejection of the proposed pipeline by the US government has brought increased attention and bravado to pipeline opponents, while also highlighting the increased risks associated with midstream entities. Specifically, pipeline opponents are now turning their attention to Kinder Morgan’s (KMI) Trans Mountain pipeline in southern Canada. Environmental advocates are pushing for a similar result that was realized along the northern Pacific coast of Canada, where the Canadian government will ban crude oil tankers, effectively ending the usefulness of Enbridge’s (ENB) Northern Gateway pipeline. These developments are both damaging to pipeline … Read more

Dividends Not Safe as Energy Markets Swoon

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We’ve been cautious on the oil and gas markets (XLE, AMLP) for some time, and that includes our October move closer to market neutral on the sector, but we’re still underweight the group. We’ve been saying that crude oil prices are more likely to hit the $20 per barrel level than move significantly higher, and we maintain our view that they may never again return to the $100 per barrel, a level many have grown accustomed to. After all, why should they? Unfortunately, the fallout continues to punish traditional “buy and hold” investors who have been trained to ignore most “news” and may still be holding on the belief of the fallacy of mean reversion, something that we believe cannot … Read more

Transaction Alerts: Moving Closer to Market Neutral on Energy

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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 … Read more

Standard & Poor’s Notes Heightened Default Risks

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Not all is well in Big Oil, or at least, not all is what it once was. The upstream oil and gas arena continues to face significant pressure from falling energy resource pricing, runaway capital spending projections and conditions that may not subside anytime soon. At the heart of the problem is OPEC’s strategy to maintain market share, apparently at all costs, which is different than the cartel’s efforts in previous cycles to support the price. Though upstream industry constituents have announced capital spending reductions and some have idled rigs, commercial inventories of crude oil remain at decade highs, and risks to the global economy, not the least of which from China (FXI), Brazil (EWZ), and Australia (EWA), threaten the … Read more

The Walking Dead?

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At 453.6 million barrels, U.S. crude oil inventories remain near levels not seen for this time of year in at least the last 80 years. – Summary of Weekly Petroleum Data for the Week Ending August 7, 2015 The oil & gas energy complex is nearing a state of panic, if it isn’t already in one. We’ve been talking about the glut of energy resource supply for many months now, and our impeccable positioning in the newsletter portfolios long before the collapse in prices is well known. Kinder Morgan (KMI) had been a relative outperformer in the Dividend Growth Newsletter portfolio until we removed it at $40 per share a couple of months ago. The same had been true with … Read more

Dividend Cushion Ratio Predicts Two More Cuts

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Forward-looking, cash-flow based dividend analysis has proven its worth once again. Chesapeake Energy (CHK) recently suspended its dividend, and Hi-Crush Partners (HCLP) has significantly cut its dividend. In each case, the Dividend Cushion ratio appropriately warned members. Early in July and prior to the elimination of its dividend, Chesapeake Energy ranked near the top of our list of dividend yields to avoid. Based on its Dividend Cushion ratio of -7.7, we rated its dividend safety as VERY POOR, and its dividend growth potential rating was also VERY POOR. The firm updated its financial strategy July 21 and eliminated its common stock dividend, effective in the third quarter of 2015. A reduction in investable capital due to the weak commodity price … Read more

Are the Oil & Gas Markets Doomed?

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Q: Are the oil and gas markets doomed? Valuentum’s Brian Nelson: In short, no. For one, if we thought the oil and gas space (XLE) were doomed, we would not be holding onto Chevron (CVX), Kinder Morgan (KMI), and Energy Transfer Partners (ETP) in the Dividend Growth portfolio. Instead, I think what we are witnessing in the oil and gas market is a flight to quality and balance-sheet strength. Our outlook for oil and gas equities has not changed before or after the recent fall in energy prices. Valuentum’s thesis accepts the fact that crude oil (USO) and natural gas prices will be extremely volatile, and that’s why we’ve gravitated toward firms such as Chevron, which has the strongest balance … Read more

$45 Oil Prices!?!? There Is Never a Sense of Urgency When One Is Prepared

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Image Source: Macrotrends The bull market in energy (XLE) has lasted for the better part of a decade. Ever since the turn of the new century, energy perma-bulls have made the case that “black gold” (USO) should continue its ever-upward price advance thanks to ongoing demand from emerging and developing economies coupled with reduced inventories and areas of supply. We’re seeing this thesis challenged right at this moment. In deciding not to cut crude oil output in the face of oversupply and falling prices, the Organization of the Petroleum Exporting Countries (OPEC), for the lack of a better phrase, is now essentially engaged in a price war with producers in the US that are using breakthrough technology to produce oil … Read more

Valuentum Economic Castleâ„¢ Rating Update

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Read: Keeping the Horse Before the Cart: Valuentum’s Economic Castle™ Rating The Economic Castle Focuses on the Magnitude of Economic Value Creation The Valuentum Economic Castle™ rating is an enhancement of the competitive advantage framework (commonly known as economic moat analysis) that has become widespread and ubiquitous within the investing world. Whereas an economic moat framework evaluates a firm on the basis of the sustainability and durability of its competitive advantages, Valuentum’s Economic Castle™ rating evaluates a firm on the basis of the firm’s future economic profit spread (return on invested capital less its weighted average cost of capital). The companies with the strongest Valuentum Economic Castle™ ratings are poised to generate the most economic value for shareholders in the … Read more

Icahn’s In-depth Letter to Apple Still Does Not Remove Time Horizon

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We believe Apple’s (AAPL) shares have valuation upside (see 16 page report), but as we have outlined before here, activist investor Carl Icahn’s proposal to force Apple to buy back stock over a certain time period (“during fiscal 2014”) as opposed to under a certain price (our fair value estimate) is imprudent. We encourage Icahn to further revise his proposal. Additionally, we think Icahn’s valuation process is too simplistic (see footnote 1), and we encourage him to disclose a more rigorous valuation assessment of the firm that takes long-term forecasts into consideration. Said differently, we’d like him to justify why Apple should trade for 16 times earnings on the basis of Apple’s own financials, not merely use the consensus market multiple for justification. … Read more