Author Topic: Energy Sector  (Read 57021 times)

james22

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Energy Sector
« on: January 09, 2020, 05:34:15 AM »
You've recently been writing some very bullish thoughts on the oil and energy sector. What's your case there?

When people get excited about this ongoing cyclical trade, they should look at oil as the ultimate distressed value asset out there. To me, oil stocks are incredibly cheap.

There are technical reasons for that, because of the large passive investment flows, and oil is a smaller and smaller part of the index. Also, there are more and more institutional investors who can’t buy oil stocks anymore because of ESG limitations.

On the other side, there is no sign that oil demand is weakening. Consumption in emerging markets continues to grow, while conventional oil investments have been reduced significantly, precisely because of all this talk that the fossil fuel era is ending.

So in your view, energy the one remaining cheap sector out there?

Yes, without a doubt. But I will freely admit that there are all sorts of technical issues because as I said many investors can’t buy oil stocks anymore. We have this bizarre situation where people can’t buy oil stocks, but people continue to consume oil.


https://themarket.ch/interview/oil-stocks-are-incredibly-cheap-ld.1384

Anyone else see an opportunity?

I'm thinking of making Energy (VGELX) a 5% position.
BRK, BAM l SV, EM l Energy l Fannie Mae, Freddie Mac l Stable Value, Cash Value of Pension


lnofeisone

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Re: Energy Sector
« Reply #1 on: January 09, 2020, 06:20:02 AM »
I have been slowly accumulating energy in the form of VGELX + select names + prefs. + debt and very much overweight in the sector.

My valuations cap oil at 75 (on WTI). My rationale is that outside of a really major disruption (Saudi field bombing, Iran flare-up are meaningless in today's world) it's just too easy to get the spigot going. Because of this, I think E&P companies (especially 2nd and 3rd tier) are not going to do well as they will pump with every price pop just to cover drilling + debt. Though their stock might be much more volatile and can probably outperform...or go to 0 (e.g., Sanchez). My other reasons, in no particular order, are:
1) I love the fact that ESGs are getting rid of their stocks (though don't really alter their energy use behavior).
2) Across the board, there is a super disgruntled and pessimistic shareholder base. Performance, MLP structure, MLP conversions, GP take unders, take your pick.
2) Demand is still growing.
3) Couple that with newfound religion of debt paydown by many energy companies (e.g., KMI) and stricter capital allocation. Markets are also not very kind to companies trying to raise debt.
4) Trash assets are being idled or being severely discounted (there is a reason why SMLP is trading where it is). This is a net positive for opportunistic buyers.

Edited for grammar.

Sullivcd

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Re: Energy Sector
« Reply #2 on: January 09, 2020, 06:37:21 AM »
Care to share any of your specific name valuations? I would love to grab some exposure here but can't get a handle on what any of these companies are actually worth.

JRM

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Re: Energy Sector
« Reply #3 on: January 09, 2020, 03:05:10 PM »
I've been focussing on the natural gas segment and specifically pipeline companies.  I think there are some incredibly cheap companies paying very high (and safe) dividend yields that have a feasible growth trajectory.  I've been in Kinder Morgan (KMI) for about a 20% gain, but I think it easily should have another 50% in it over the next year or two.  I also like Williams (WMB) with good natural gas exposure.  Worldwide natural gas consumption is expected to grow until around 2050 according to EIA.  I keep hearing 50% growth in worldwide consumption from 2020 to 2030.  Kinder Morgan is my largest position.  Rich Kinder is still somewhat involved and heavily invested in the company personally.  Listening to him talk I get the impression he knows what he is talking about.

I recently sold Cheniere (LNG) for a decent return because the situation was getting too complicated for me, but there is probably opportunity in LNG exporting.  I'm going after the LNG shippers.

Risk in natural gas pipelines is primarily counter-party risk as we saw in the last downturn.  The new integrity regulations aren't too burdensome.  Another risk that I'm heavily discounting is that Elizabeth Warren bans fracking.  Doesn't seem possible to me.

lnofeisone

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Re: Energy Sector
« Reply #4 on: January 09, 2020, 03:37:55 PM »
Care to share any of your specific name valuations? I would love to grab some exposure here but can't get a handle on what any of these companies are actually worth.

In the pipeline space I rotated into EPD (great management, interests align with Duncan family), ET (amazing assets that trade at Kelcy Warren discount), WMB (amazing assets at good price...and eventually NY will figure out that they need to expand their pipelines), and tiny bit of AM. I think all these names can trade up 30-50%. I like selling KMI puts when it dips to 20s. Wouldn't mind getting some shares assigned to me. I like CNXM but don't love the price.

For prefs. I have TGPpA (this one is a shipper so I generally don't buy common but it's worth a look) and CEQPp. For debt I bought some Sanchez bonds when they were trading at 5 cents on the dollar (mostly learning/entertainment value of going through BK). Currently they are trading at 3.75 cents on the dollar  ;D.

james22

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Re: Energy Sector
« Reply #5 on: January 09, 2020, 08:29:13 PM »
Morningstar:

The energy sector is the most undervalued heading into the new year: The median stock in our coverage universe trades at a 10% discount to fair value, says director David Meats in his quarterly wrap-up. Oilfield-services stocks look particularly attractive, trading at a 16% discount to fair value. But we see buying opportunities among all industries.

https://www.morningstar.com/articles/961514/33-undervalued-stocks-for-2020

https://www.morningstar.com/articles/961161/energy-most-undervalued-sector-heading-into-the-quarter

They like Cheniere, Unbridle, and Schlumberger.
« Last Edit: January 09, 2020, 08:49:42 PM by james22 »
BRK, BAM l SV, EM l Energy l Fannie Mae, Freddie Mac l Stable Value, Cash Value of Pension

james22

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Re: Energy Sector
« Reply #6 on: January 09, 2020, 08:47:48 PM »
Reason number one to be bullish on energy stocks is their relative cheapness. The sector looks extremely undervalued as institutional investors have abandoned their positions in energy stocks and systematic funds are shorting oil.

https://www.investopedia.com/5-reasons-energy-stocks-could-surge-4772280

Craig Johnson, senior technical research analyst and managing director at Piper Jaffray, said Thursday he had “no question” that now was the time to do a “bottom-fishing exercise.”

“Talking to all these institutional accounts, they do not like energy. They don’t want to touch energy. They’ve been burnt in energy for so long. And fundamentally, they’re going to point out all the problems with it,” Johnson said on CNBC’s “Trading Nation.” “But, as a guy that likes to look at charts, these stocks tend to lead the market six to nine months ahead of time.”


https://www.cnbc.com/2019/11/22/energy-stocks-to-invest-in-as-worst-performing-sp-500-sector-turns-up.html
BRK, BAM l SV, EM l Energy l Fannie Mae, Freddie Mac l Stable Value, Cash Value of Pension

Palantir

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Re: Energy Sector
« Reply #7 on: January 19, 2020, 04:55:00 PM »
My question is - if there's diminishing institutional investor interest in these names, how can you have a position that's going to rerate upwards in terms of valuation?

I don't dispute that these names are quantitatively cheap. But I would think that for good returns, you would want to be in a name that sees the potential for multiple expansion. What is the case for multiple expansion in energy?
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DooDiligence

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Re: Energy Sector
« Reply #8 on: January 19, 2020, 05:59:08 PM »
Institutional interests wax & wane over time & across sectors.

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/dataarchived.html#corpgov

It seems like just yesterday that we were going to run out of oil soon,
and then we were awash in the stuff.

Predicting supply & demand is like predicting hurricane tracks.
Better to just say there will be hurricanes.

Energy will go down & it will go up, and down & up, and down & up...

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Spekulatius

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Re: Energy Sector
« Reply #9 on: January 19, 2020, 06:51:39 PM »
RDS is an oiled major that seems to become more like an utility over time. At least that’s the ghost I am getting from the management presentations. The bull case is probably that it is way cheaper than any utility one can buy, with a dividend yield of ~6%+ and improving financial performance, I can see the stock retreating over time.
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