It’s the start of the New Year, so here is my overview for your energy portfolio coming into 2018. I have written in the past six months in a far more aggressive slant than most on oil and oil stocks, and we’ve been rewarded as oil has rallied above $62 a barrel. For those who relied upon the forecasts of the bank analysts and government agencies, I’m afraid you’re well behind the curve – the oil train has already left the station.
Which doesn’t mean you should give up on oil – this bull market that I have predicted in oil and oil equities is just starting and has at least another two years to roll – making 2018 the key year for positioning and profitability. If you haven’t started putting together an aggressive list of stocks for the coming year yet, it’s not too late to start. That’s what this column is about.
In energy investing, I have always been successful by analyzing a medium to long-term thesis on energy prices and trends that normally points me in a more likely sub-sector for success. For example, if I could make the case that technology in off-shore drilling was accelerating, helping to slash costs of deepwater recovery, I might center on those producers to have stellar years that would outperform other energy sectors. Instead, if you’ve read my columns, you’ll know that I have analyzed U.S. horizontal production as the most likely to earn the biggest profits, and tried to find those producers with the best possible acreage and the most stable balance sheets – a well-thought out and well-capitalized growth plan also adding a major plus. This has pushed me, on balance, towards Permian producers that have not expended all of their energy (and capital) from 2014-2016 mechanically increasing production during market periods of limited returns.
By using this methodology for finding stock winners, one of the major benefits has been to avoid loser sub-sectors that are most likely to lag. I had a very good investment year in 2017, mostly because I was not throwing money at ‘energy companies’ willy-nilly, but selectively choosing those that would fast benefit from any increase in oil prices I saw coming. So – for example: Cimarex (XEC), not Chesapeake (CHK). Concho (CXO), not EQT Corp. (EQT). I have also avoided, for the most part, energy services companies and offshore players as I expect their roads back to full health to take longer. There will come a time for all of these sub-sectors to shine, but for the moment, we need to concentrate where the initial gains in oil will be most quickly felt in rising stock prices.
I also don’t want to leave out the mega-cap majors who might not have the beta of U.S. independents but still will be one of the first sub-sectors to benefit throughout 2018. I recommend a significant part of your energy portfolio be made up of these, dependent upon your risk profile, as their deliver fine (and secure) dividends as well as capital appreciation. Total (TOT) and Chevron (CVX) are two of my favorites here (for entirely different reasons – but no time to go through that here).
It’s not all been sunshine throughout 2017. I’ve missed a significant rally in U.S. refiners to new highs through the latter half of the year which I’ve been largely unable to explain. The business model for the refiners has always been good, but the rising costs of crude through the last half of 2017 should have halted some of their gains in recent months. Instead they continue to roar. But I’ll figure it out eventually.
The point however is that it’s not too late to take a good look at your energy portfolio and get it ready for 2018. I’ll be here to help you along the way, but getting started is the most important part. And you will want to be a part of it. I believe 2018 will represent one of the best energy investment opportunities I’ve seen in the last 15 years.
By Dan Dicker