An Energy Investor Roadmap For The Future

I've been writing for O&E insider for nearly 6 years now. For this last column, I think the best thing would be to try to give a roadmap to you as an investor for the future without me, or as near as I can see it.

First, our investment thesis: I believe that the current 4 -year dip in energy prices is not a systemic change in the oil economy, but another cycle of the many I've seen in my career in the dynamic shifting of global oil supply, demand and price. In the six years that I've been writing here and documenting this latest bust cycle, I've perhaps missed somewhat on the timing of the recovery, but not on the inevitability of it.

Now we have global oil prices again touching $80 a barrel (ignoring the differentials here in the U.S. for the moment), with the major predictors of supply and demand showing an acceleration towards prices again going well above the three-digit mark - perhaps as early as the 2nd quarter of 2019.

What could derail that? Obviously, a global recession, of which there are some likely signs showing themselves right now. We must be vigilant in keeping track of those, of course. But more pressing is the trade dispute between the U.S. and China, which has shown little motion towards a resolution. I don't believe it will remain that way for long though. Already with Mexico, the Trump administration found some small concessions with which to claim victory and is well on its way to restoring a new NAFTA agreement with Canada as well, with few differences to mark.

We need to hope this will be the outcome with China as well. I think it will be.

So, with our thesis on relatively steady ground still, where do we go for investments to take advantage of coming higher oil prices?

I've preferred Euro majors for less risky investments, and we've done well with names like Total (TOT), continuing to deliver 4-6% dividends and share appreciation to boot. While I've correctly advised against the U.S. majors, Exxon-Mobil (XOM) is now so beat up that it too delivers a 4+% dividend, which I've never seen before - and their balance sheet still allows massive safety and continuing stock buybacks to come. It's the one U.S. major I'll bless right now.

I've also, correctly, sent investors to find beta in U.S. independent shale producers - and still see that as the best beta play in the oil patch for the relative long-term. My preference was in Permian producers, but as that infrastructure logjam has gotten worse, I've tried to find producers with optionality and not singular acreage in the Permian. One alternative area worth looking at is the DJ Basin, but those players are on hold until after the midterms when the anti-fracking bill in Colorado will be decided. If it is defeated, be prepared to load up on DJ specialists Noble Energy (NBL) and Andarko (APC). Oil services will have its day, but as production will continue to see tremendous growth limitations, your choices there will need to remain nimble - and for right now, I don't see much to get excited about. Refiners have reaped all the benefits of plentiful, cheap, low sulfur oil for the last two years, and I'll be the first to admit I missed the power of this move - but also find it difficult to buy them here. Their luck is sure to run out as it always does, when production in the U.S. finally levels off from the rampant growth it's experienced in the last two years (now nearing 10.7m b/d!!).

In natural gas, we continue to wait for the same kind of clearing of supply that oil's experiencing, but without export markets, competitive pipelines and the associated extra supply that's come from increased oil fracking, the natural gas markets still seems to have a longer road ahead. That said, I still believe that natural gas will have its turn again as oil is having now. The stocks themselves are either bargains or traps, dependent on whether the natural gas bust will still be able to bankrupt of few of them before the turnaround, but my canary in the coalmine will remain Chesapeake Energy (CHK) - if they can stay in business, the rest of them should make it to the next gas boom too. Therefore, I have been recommending a small speculative stake in a Marcellus specialist or two to sit on - just to have a nice basis start to a bigger portfolio when gas gets rolling.

Of course, I could talk all day about investment prospects (as I have for 6 years), but that's about as quick a summation of where I think energy will be headed for the next two years or so. And further than that, no one can even begin to judge. Good luck.