Energy Sector

  • 05 Jun
    MRO is a bad bet in this market

    MRO is a bad bet in this market

    Yesterday I wrote about the opportunity that I think exists in the energy sector among oil refiners and transportation stocks. That stems from infrastructure challenges that are likely to restrict the ability of oil producers to keep pushing production higher to meet ever-increasing demand. That is one of the factors that is playing itself out right now and is reflected by a much wider than normal spread between WTI and Brent crude prices. I think that limits the upside of U.S. producers like Marathon Oil Corporation (MRO), who have major exposure to the oil fields that are most affected by limited transportation capacity.

    How long is the problem likely to last? There are major projects underway now to expand existing pipeline and storage infrastructure, but even the most optimistic forecasts don’t expect those facilities to come online until late 2019 or even 2020. While crude from areas like the Eagle Ford and SCOOP/STACK oil fields in Texas and Oklahoma are currently running about $11 per barrel below the price of comparable Brent contracts, oil from the Permian basin is even lower, with the spread at nearly $20 per barrel below Brent. Production remains high, which means that companies like MRO are being forced to use more expensive means to get their product to market.



    MRO is a company with a very solid fundamental profile, including solid cash flow that reflects strong balance sheet management over the last several years. That reality, along with an increase in the price of WTI crude from the low $40 range to a little above $70 in late May, helped the stock rally over the same period from a low a little above $10 to its recent peak, reached at about the same time as the peak in WTI, at about $22 per share. That is a one-year, long-term trend that under most circumstances would lead analysts to forecast even more growth. Given the external pressures I’ve already mentioned, however, and the stock’s state as of now as a bit overvalued, I think there is greater downside risk for this stock than there is growth potential.

    Fundamental and Value Profile

    Marathon Oil Corporation is an exploration and production (E&P) company. The Company operates through two segments: United States E&P and International E&P. The United States E&P segment explores for, produces and markets crude oil and condensate, natural gas liquids (NGLs) and natural gas in the United States. The International E&P segment explores for, produces and markets crude oil and condensate, NGLs and natural gas outside of the United States, and produces and markets products manufactured from natural gas, such as liquefied natural gas (LNG) and methanol, in Equatorial Guinea (E.G.). MRO has a current market cap of $17.6 billion.



    • Earnings and Sales Growth: Over the last twelve months, earnings more than tripled, while sales grew more than 50%.
    • Free Cash Flow: Over the last twelve months, Free Cash Flow has Increased steadily and is very strong at more than $2.9 billion as of the company’s most recent earnings statement.
    • Debt to Equity: the company’s debt declined from about $6.7 billion to a little less than $5.5 billion as of the most recent quarter. Their balance sheet indicates that operating profits are abundantly sufficient to service their debt, and also that liquid assets are more than adequate to cover any potential shortfall in operating profits.
    • Dividend: MRO pays an annual dividend of $.20 per share, which translates to an annual yield of a little less than 1% at the stock’s current price.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods uses the stock’s Book Value, which for MRO is $14.16 per share. At the stock’s current price, that translates to a Price/Book Ratio of 1.46. The stock’s historical Price/Book Ratio is .9, which is 38% below its current level. The industry average Price/Book ratio is 2.1, which could offer a long-term target for the stock a little above $29 per share. How should an investor resolve the difference? Consider the potential upside versus the downside risk. That translates to a reward: risk ratio of nearly 1:1. Smart investors look for stocks that offer a ratio of 2.5 or 3 to 1 at minimum.



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

    MRO 1-year chart

    • Current Price Action: It’s pretty easy to see the strength of the stock’s upward trend since mid-August of last year. The trend peaked last month at about $22 per share and the stock is down marginally from that point. Historically speaking, the stock has shown considerable resistance in the $20 price area, which appears to be coming into play now. If the stock continues to move lower, it should find some stabilization around $19 per share, but a break below that point would probably see the stock test its March swing low around $15.
    • Trends: Basic trend analysis leans heavily on a principle based on the maxim, “the trend is your friend.” The most practical application of this idea uses the next longer trend versus the trade you’re thinking about to dictate your forecast. If you’re thinking about taking a position that would cover anywhere from a few weeks to a few months, the long-term trend is your primary point of reference. In MRO’s case, that would mean you’d take a bullish view of the stock right now. The fact the stock is dropping off of a trend high could actually be a bullish, positive indicator, if the stock breaks above resistance to about $23 per share. A drop below $19.50 would mark a breakdown of the stock’s short and intermediate trends and would increase the likelihood the long-term trend could also reverse.
    • Near-term Keys: Watch the stock’s movement carefully over the next week or so. A break above $22.50 would likely mark a continuation of the long-term trend to new 52-week highs and could mark a good bullish trade, either by buying the stock or working with call options. On the other hand, a break below $19.50 could offer an attractive bearish trade, either by shorting the stock or using put options.


    By Thomas Moore Energy Sector Oil
  • 04 Jun
    This Oil Pipeline Stock is ready for a BIG upside move

    This Oil Pipeline Stock is ready for a BIG upside move

    One of the most interesting developments of the past week that a lot of investors probably didn’t pay a lot of attention to is the widening spread between U.S. (WTI) and Middle Eastern (Brent) crude oil. WTI, short for West Texas Intermediate, typically trades at a discount of a few dollars per barrel compared to Brent crude, but over the last week that spread has increased to a little over $11 per barrel. The last time that kind of spread happened was 2015, and prior to that it was 2011. The rarity of such a discrepancy is a big part of what opens up an opportunity for investors who are paying attention.

    I think a lot of stock investors miss these kinds of anomalies is because of the fact that it reflects most directly on the commodities themselves. Unless you are actively involved in trading commodities futures, you might not think too much about the price of a barrel of oil except in relation to how its impacts the price you pay at the pump for gasoline. So how does this translate to something a stock investor can use to guide an investment decision?



    A wider-than-normal spread between these two competing commodities can be caused by a lot of different things, but it usually implies some kind of negative pressure on U.S. producers. I this particular case, the spread appears to be a reflection of the reality that U.S. producers have been increasing production consistently for quite some time now, to the point that U.S. transport infrastructure – pipelines and storage facilities, in particular – to handle the supply is almost uniformly already running at full capacity. That means that producers can either scale back production, or find other transportation methods, such as truck and railroad transport, which are more expensive than pipelines. Either way, the pressure is on producers, while pipeline and storage companies are working as hard as they can to bring new capacity online.

    The problem is that new pipelines and storage facilities take time to build and get up and running. An increasing number of experts think that the current capacity limitations will persist through 2019, which means that U.S. crude prices could see limited upside potential on that commodity for the foreseeable future. On the other hand, pipeline and transportation companies are in a advantageous position, since they can charge a higher premium to those producers. Oil refiners are also in a good spot, since the bigger spread means that they can buy U.S. crude at a deeper discount, which naturally improves their profitability potential.



    There are a number of stocks that could be in prime position to see great upside due to the factors I’ve just outlined, but the stock I’m highlighting today, EPD is one that also has a good fundamental and technical basis that bolsters that forecast even more. Let’s take a look.

    Fundamental and Value Profile

    Enterprise Products Partners L.P. (EPD) is a provider of midstream energy services to producers and consumers of natural gas, natural gas liquids (NGLs), crude oil, petrochemicals and refined products in North America. The Company’s segments include NGL Pipelines & Services; Crude Oil Pipelines & Services; Natural Gas Pipelines & Services, and Petrochemical & Refined Products Services. The Company’s midstream energy operations include natural gas gathering, treating, processing, transportation and storage; NGL transportation, fractionation, storage, and import and export terminals, including liquefied petroleum gas (LPG); crude oil gathering, transportation, storage and terminals; petrochemical and refined products transportation, storage, export and import terminals, and related services, and a marine transportation business that operates primarily on the United States inland and Intracoastal Waterway systems. EPD has a current market cap of $63.8 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings grew by a little more than 8%, while sales grew more than 27%.
    • Free Cash Flow: Over the last twelve months, Free Cash Flow has declined modestly, but remains solid at about $1.4 billion as of the company’s most recent earnings statement.
    • Debt to Equity: the company’s debt increased by about 10% over the last year, but is manageable, as their operating profits are more than sufficient to service their debt.
    • Dividend: EPD pays an annual dividend of $1.71 per share, which translates to an annual yield of more than 5% at the stock’s current price.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods uses the stock’s Book Value, which for EPD is $10.63 per share. At the stock’s current price, that translates to a Price/Book Ratio of 2.76. The stock’s historical Price/Book Ratio is 3.4, which is 23% above its current level. If the stock rallied to par with that historical average, its price would be $36 per share, a level the stock last saw late in 2014.



    Technical Profile

    EPD has been hovering in a relatively narrow range for most of the past two years, but I think the economic factors I’ve already outlined could act as a catalyst to drive the stock out of that pattern. Here’s a look at the stock’s latest technical chart.

    EPD 5-year candlestick chart

    • Current Price Action: The chart above covers a five-year period because I want you to think about this stock’s potential beyond the limits of its range over the past couple of years. A lot of investors tend to think only about 52-week high or low ranges, but when you see that the stock’s actual high in late 2014 was around $41, the fact that the stock is now pushing near to a 52-week high seems less formidable.
    • Trends: We tend to think about stock trends only in upward or downward terms, and in that context the stock’s short-term upward trend since April of this year is a positive. I’ve used the horizontal red and green lines on the chart to illustrate the stock’s actual long-term trend, which in real terms can only be considered sideways. The stock is at the upper limit of its 2-year range, and that does mean that the stock could break down and drop back down toward the $24 price range it last saw two months ago. On the other hand, a break above that red resistance line, to the $30 level should give the stock the momentum to drive to between $34.50 and $35 in the near-term, and if the trend holds, it wouldn’t be surprising to see the stock test its multi-year high around $41. That is, admittedly, a best-case scenario, but it also offers a long-term price target nearly 40% above the stock’s current level.
    • Near-term Keys: Watch the stock’s movement between its current level and $30. A break above $30 is a prime opportunity to go long, while a break back down below $29 could offer a good bearish-oriented trade, either by shorting the stock or by buying put options.


    By Thomas Moore Commodities Energy Sector Oil
  • 23 May
    Energy Storage Is The Next Big Trend – Here’s What You Need To Know Before Investing

    Energy Storage Is The Next Big Trend – Here’s What You Need To Know Before Investing

    • The technology is close to being profitable.
    • This will not only boost the industry, but also renewables.
    • Knowing what’s going on is key to profitable investing.



    Introduction

    Right now, solar is doing really well with the latest positive news being the state of California making it mandatory to install solar roofs on new houses by 2020.

    However, solar and wind energy, the drivers of renewable energy, are both very volatile and don’t produce most of their energy when it’s needed. You never know whether it will be windy, and solar energy is mostly produced during midday despite the highest consumption occurring in the evening. This leads us to the key component for renewables, which is energy storage.  More →

    By Sven Carlin Energy Sector Investiv Daily
  • 25 Jul
    Is It Time To Invest In Natural Gas?

    Is It Time To Invest In Natural Gas?

    • There are many influences on natural gas in the short term, but the long term is pretty clear.
    • Despite the growth in demand, there is no supply gap expected, and thus cost and moats should be looked for in potential investments.
    • As the long-term trend is positive, it’s a good thing to buy when there is pessimism in the sector, which is usually for a relatively short period.

    Introduction

    I recently wrote an article on oil where I discussed the implications of and best timing to invest in oil. A commodity that is closely related to oil is natural gas. However, the long-term supply and demand trends are a bit different than those for oil which make natural gas an interesting long-term investment opportunity. More →

  • 20 Dec
    Be Overweight In These Sectors In 2017

    Be Overweight In These Sectors In 2017

    • Increasing interest rates make earnings growth unlikely and increase the probability for a decline of the S&P 500.
    • To beat the S&P 500, you have to invest in sectors that offer a better risk reward ratio than the S&P 500.

    Don’t Go For 10 To 20 Percent Returns In 2017

    With the S&P 500 yielding 3.85% going into 2017, stocks in general are currently an investment vehicle that gives you a small and limited upside with a potentially large downside.

    We know that the FED plans to raise interest rates another three times in 2017. If that happens, the investments people consider most secure—like treasuries, dividend paying blue-chips or REITs—will be hit the hardest because as required yields go up, their asset prices will go down. Therefore, the best way to prepare for 2017 is to position yourself so that if the FED raises rates, your upside is far bigger than 3.85% and your downside far smaller than the potential downside of the currently overvalued stock market. More →

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