On September 6, 2018, our portfolio managers conducted a webinar:  The Times They Are A-Changin’: The Case for Energy Equity Investment Now.

 

 

If you missed the session, we offer the following Key Takeaways

 

OIL PRICES TO BE SUPPORTED BY TIGHTENING FUNDAMENTALS

  • Crude softness this summer was simply a timing mismatch between an increase in Saudi barrels following the June OPEC meeting and our expectation for dramatic fall in Iranian exports with additional US sanctions effective Nov 4, 2018.
  • Iranian production to fall 1.0-1.6MMbpd.  Even including some offset from higher Saudi production and a 11MM barrel release from the US SPR, this provides significant cushion to a potential decline in emerging market demand due to a higher USD.

 

SHORT SIGHTED MARKET VIEW OF PERMIAN ACTIVITY

  • Relates to another timing mismatch, as a tremendous amount of takeaway capacity is being added in late 2019 and early 2020 that should dramatically reverse the current pipeline shortage in the Permian Basin.
  • We believe over the next several months the market will finally begin to look through the current soft patch in well completions and begin to price in a recovery in Permian activity, especially for oilfield service stocks which have been hardest hit.

 

TRANSFORMATIONAL CHANGE WITH CAPITAL DISCIPLINE FOCUS

  • The shift to capital discipline is making exploration and production companies look attractive as margins have expanded and free cash flow is ramping up significantly.
  • Many of these companies have started to return capital to shareholders through share repurchases and dividends.

 

MIDSTREAM VEIL OF COMPLEXITY LIFTING

  • Trends toward MLP structural simplification is significant because it’s providing investors with not only improved transparency but importantly it represents an aligning of the interests of managers with investors.
  • Either through self-funding or more creative means of sourcing capital, many midstream companies are relying less on public equity markets, also a positive for public equity unitholders.

 

SOLID EVIDENCE OF MIDSTREAM GROWTH TAILWINDS

  • The abundance of low cost, reliably sourced, U.S. hydrocarbons is increasingly being demanded by domestic and foreign consumers.  This growth tailwind is driving the need for expanded infrastructure to facilitate oil, natural gas and natural gas liquids transport.
  • Four key market segments are providing evidence of strong demand pull for U.S. hydrocarbons:  1) Increasing Exports of crude oil and LNG; 2) Healthy petrochemical industry demand for feedstock in ethane and propane; 3) Rising natural gas demand for power generation in the U.S.; and 4) Growing transportation fuel demand providing refining industry throughput volume expansion.

 

MIDSTREAM VALUATION COMPELLING

  • Midstream equities, both C-Corps and MLPs continue to trade at a discount to historical average multiples of firm cash flow as measured by Enterprise Value to Forward EBITDA, in contrast to other energy subsectors as well as REITS and Utilities which trade at a premium on the same basis.
  • We believe midstream equities are poised to attract ‘investor share’ from the Utility sector as investor friendly management action and improving fundamentals combine to promote future distribution stability.

 

MEDIUM-TERM DRIVERS FOR FURTHER OIL TIGHTNESS

  • Supply impact beginning in 2019 of many large, long-lead time projects that were canceled during prior oil downturn.
  • IMO 2020 — A new rule that mandates low-sulfur fuel be used to power ships or that shipowners install scrubbers.  Could tighten the crude markets by 1.5MMbpd alone.

 

DO OIL EQUITIES REALLY NEED $90/BARREL OIL TO WORK?

  • No.  We run valuation scenarios at a variety of commodity prices and at a $65 realized long term oil price we believe there is upside in the oil related equities.

 

DISCLAIMER:

The information provided does not constitute investment advice and is not an offering of or a solicitation to buy or sell any security, product, service or fund, including the fund being advertised.

All information provided herein is for informational purposes only and should not be relied upon to make an investment decision.

The charts, tables, and graphs contained in this document are not intended to be used to assist the reader in determining which securities to buy or sell or when to buy or sell securities.  The projections or other information in this blog post regarding the likelihood of various future outcomes are hypothetical in nature and do not guarantee any particular future results.  Additional information is available upon request.  Unless otherwise noted, the source of information for the charts, graphs, and other materials contained here in BPCFA.

This document may contain forward-looking statements and projections that are based on our current beliefs and assumptions and on information currently available that we believe to be reasonable; however, such statements necessarily involve risks, uncertainties and assumptions, and prospective investors may not put undue reliance on any of these statements.