As a professional trader, I depend upon having a plan. One of the only things that sets me apart and gives me any advantage in my energy investing decisions is the plan that I devise. You need one too.
I cannot stand investment advice that is based upon, for example, the reading and analysis of corporate reports – this is the most ubiquitous and 'known knowns' of investing information and, I've found, nearly useless in practice. If everyone's got it, it's got to be worthless – that's what I believe.
In the energy sector, my plan has been well documented in my book and I again invite you to read it. From a macro point in that timeline that I laid out, we are in the final 12-month throes of the oil bust cycle. That means that although there are likely several quarters to go before oil companies again become profitable and growth candidates, the stocks will begin to react to that upcoming turnaround.
In fact, I believe that has already begun.
Inside the energy sector are several sub-sectors that will move at different rates of speed in this recovery process and I have focused mostly on the ones that I believe make the return move first: the independent E+P's. But in making your own plan for investing in the energy space, you need to know where your money will do the most good the quickest. So here's an overview on what I believe will be the staggered return profile for some of the major energy sub-sectors. From this, you'll be better able to craft your own 'timetable' for investment.
1 – Domestic Independent Exploration and Production: There is a strange dichotomy in this sub-sector where we'll actually see companies get restructured and common shares become nearly worthless while others begin to increase their share prices three or four fold. But seeing some in this sector going broke is not an indictment of the group; on the contrary, the weeding out of the weakest players only makes room for the strongest to dominate. Halcon, Sandridge, Exco, Oasis, Sanchez and a host of others that are destined to be 'chastened' in some major way will only help the ultimate prospects of EOG, Cimarex, Hess, Anadarko, Devon and a few others. But these are the ones that will be the early beneficiaries of the new oil boom to come.
2 – Oil services: These will be second to benefit from the revitalization of US independents. I wouldn't hesitate to distinguish in this sub-sector as we did for E+P's either – those that concentrate on onshore fracking (like Helmerich and Payne) will surely be last to recover as compared to full service providers like Schlumberger.
3 – Offshore Drilling: The down cycle in offshore drilling still has every indication of lasting longer than just about every other energy sector – the plus side of this is the deep values that are being seen here. While it is likely to be very late to the recovery, those that survive are likely to experience exponential share growth.
4 – Infrastructure MLP's: Lower production targets for the US in both oil and natural gas makes the MLPs one of the most difficult investment areas for longer than anyone. Add to the fact that interest rates are destined to go higher and you've got a sector that has been floating on air for quite a while already before the massive collapse of the sub-sector last month. I advised readers to stay away from these for nearly 2 years, and even with this collapse, I don't recommend buying anything, save for one: Kinder Morgan (KMI) – and it's not even an MLP anymore.
5 – Refining: With ultimately rising oil prices, lower domestic production, rising interest rates and the possibility that the crude oil export ban will be repealed, there is no worse sub-sector of energy to be in than the refiners. I'm sure somewhere there may be something worth buying for the short-term here, but I'm not even wasting my time attempting to find it – too much of the coming macro environment is against them.
Notice that this column is not a “buy this stock at this price” kind of piece. I specifically wanted to point out my macro plan for investing and leave the micro (and very critical) choices of which stock and which price to you.
It is in YOUR plan that your profits must ultimately come