The recent wild behavior in the energy MLP sector - tumbling nearly 3x more than the S&P 500 during the first 10 trading days of October before rallying this week, with an assist from Shell Midstream Partners (NYSE:SHLX), which went public in a $1.1B offering and gained 46% - should not weaken the investment case for those who are choosy and hold for the long term, analysts say.
Investors worry that some E&P companies won’t be able to make money in a low oil price environment, and MLPs in the same business face tough times, but those upstream MLPs make up only ~5% of the total value of the sector, perhaps suggesting that the across-the-board decline was too extreme.
MLPs may remain expensive relative to their own history, but their average distribution of 5.5% in annual income - which should grow at ~7%/year in the next few years to 12%-plus - is plenty attractive relative to everything else.
To steer clear of the risk that lower energy prices will crimp profits, analysts advise concentrating on midstream operators; among the most stable are ETP, ETE, EQM, MMP, PAA, PAGP and SXL.
The average gallon of gasoline in the U.S. will cost less than $3 this weekend for the first time in nearly four years, with more than 60% of all U.S. stations selling gas for less than $3/gallon, according to AAA.
"We're going to continue going down, and by Thanksgiving I'm seeing $2.80 a gallon" before stabilizing into early 2015, oil analyst Andy Lipow tells CNBC, noting that gasoline futures are tumbling, which will be passed on to consumers over the next few weeks.
Lipow remains wary of a potential market surprise if Saudi Arabia decides to cut production, "since the market thinks that OPEC is going to do nothing."
United Steelworkers leaders, representing employees at two-thirds of U.S. refineries, are "looking for a fight" as they prepare to negotiate the next three-year contract with refiners, says the USW international VP who manages the union’s oil sector.
The USW is seeking a substantial increase in wages, stronger rules to prevent fatigue and measures to preserve the share of union workers rather than contract employees.
During the last round in 2012, USW and Shell (RDS.A, RDS.B), which represented refiners, spent about a month in negotiations before agreeing to a national contract which was used as the foundation for forging refinery-by-refinery contracts with union locals.
An S&P index of refiners - including Exxon (NYSE:XOM), Chevron (NYSE:CVX), Marathon Petroleum (NYSE:MPC) and Tesoro (NYSE:TSO) - has more than doubled since the beginning of 2012, and the unions want a piece of the pie.
Both companies reported better than expected Q3 earnings today (I, II), with executives touting the importance of owning massive refineries alongside oil and gas wells, "demonstrat(ing) the strength of our integrated business model," as XOM CEO Rex Tillerson says.
XOM’s Q3 profit from refining jumped, helping drive a 2.5% Y/Y increase in its total profit, while CVX’s refinery earnings more than tripled, propelling a 13% jump in overall profit; XOM said it sold U.S. oil for $89.60/bbl on average, down 12% Y/Y, while international barrels fetched $96.76, or 9.3% less, and CVX said its U.S. price fell $10/bbl to $87 as international prices fell $93 from $104.
But sustaining profits could be more of a challenge if demand for fuels continues to weaken around the world, which could limit output and profit gains at refining operations; also, refining profit margins already are shrinking as gasoline and diesel prices are dragged lower by the crude from which they’re derived.
Southwestern Energy (NYSE:SWN) is initiated with an Outperform rating and a $50 share price target, implying a potential ~57% gain, at Imperial Capital, which believes SWN is positioned as one of the lowest-cost producers in the U.S. and potentially taking market share in the midst of a major step-up in U.S. demand for natural gas the firm sees as likely in the 2016-17 period.
As a low-cost producer, SWN is one of the few U.S. E&P companies with the potential to flourish in a low $4.00/Mcf U.S. natural gas price environment the firm expects over the next few years.
A recent $5.4B property acquisition in the southwest Marcellus and Utica play region from Chesapeake Energy fits what SWN does best and can become a third low-cost core growth area, Imperial adds.
Tesoro (TSO +5.4%) jumps more than 5% after the oil refiner reported Q3 earnings that easily beat expectations on better than expected refining margins, higher than estimated refining throughput, and record retail performance.
Cowen raises its TSO target price to $90, saying the company's refining segment outperformed in all regions with throughputs 60K bbl/day higher than it estimated, and the retail segment beat operating income estimates by $100M on margins 100% higher than anticipated.
Shares are upgraded to Outperform at Howard Weil, which cites California synergies and YTD business improvements of $390M, on pace to exceed FY 2014 guidance of $370M-$430M.
Dominion (D -1%) submits a request to the FERC to begin an environmental review of the proposed $4.5B-$5B Atlantic Coast Pipeline.
JV partners Dominion, Duke Energy (NYSE:DUK), Piedmont Natural Gas (NYSE:PNY) and AGL Resources (NYSE:GAS) plan to build and own the pipeline, which would supply North Carolina and Virginia with 1.5B cf/day of natural gas from the Marcellus and Utica shale basins of West Virginia, Pennsylvania and Ohio.
Dominion earlier reported Q3 earnings that came in below expectations and revenues fell 11% Y/Y, as the utility said its service territory experienced one of the mildest summers in the last 30 years.
Cheniere Energy (LNG +1.2%) reaches a tentative settlement with investors that would restrain executive compensation following shareholder litigation over pay practices that included CEO Charif Souki’s $142M compensation last year.
If approved, the accord would prohibit LNG from paying out any remaining shares it had authorized in a Feb. 2013 vote but hadn’t yet distributed to executives or employees; it would not require Souki or any employees to give up awards already received.
The agreement also would bar the company from seeking shareholder approval for any stock-based compensation before Jan. 1, 2017.
Westport Innovations (WPRT -3%) is lower after posting a lighter than expected Q3 loss but revenues fell 45% Y/Y and operating expenses rose 61%.
Deutsche Bank downgrades shares to Hold from Buy with an $8 price target, down from $12, seeing a weak oil price environment impacting near-term adoption of natural gas vehicles and uncertainty about timing of cash flow breakeven.
The firm expects shares to remain range-bound until seeing more evidence of EBITDA improvement or OEM/product announcements.
British Columbia and Alberta are banding together to push the Canadian government to let energy investors deduct costs of building liquefied natural gas shipping terminals and oil sands processing plants at the same rate as manufacturers.
LNG facilities are allowed depreciation rates of 8% while oil sands refineries and upgraders can apply a 25% rate, but manufacturers qualify for a 50% rate under a temporary policy introduced in 2007 that’s due to expire at the end of 2015.
Reclassification would help level the playing field with other countries, according to the BC LNG Developers Alliance, a group representing companies including Shell (RDS.A, RDS.B), Chevron (NYSE:CVX), BG Group (OTCQX:BRGYY, OTCPK:BRGXF) and Petronas.
It was "pipeline theater at its finest" when TransCanada (NYSE:TRP) officially filed its Energy East application to the National Energy Board yesterday - 30K pages in 68 binders in 11 boxes, with panels of top executives in Toronto and Quebec City to explain the benefits - Financial Post's Claudia Cattaneo writes.
The company pulled out all the stops "but that’s what it takes these days to get a pipeline approved [in] a social license obsessed world."
The 4,600 km pipeline would carry 1.1M bbl/day of crude from Alberta and Saskatchewan to refineries in Quebec and New Brunswick, and reduce Canada’s dependence on the U.S. oil market by enabling exports to Europe and the Far East.
Walter Energy (WLT -2.2%) opens sharply lower as BB&T downgrades shares to Underweight from Hold, believing WLT will run out of cash in the next 12 months and that the best alternative is to restructure with some cash on the balance sheet to exit as a stronger company.
BB&T says WLT needs a met coal price of ~$170/metric ton vs. the current $109.50spot price, making a restructuring "the only right choice."
Cowen cuts its price target to $3.50 from $5.50, saying better than expected Q3 results show WLT is managing reasonably well through the downturn but a met coal recovery is likely to be drawn out (Briefing.com).
Kinder Morgan (KMI, KMP) seeks a court order to stop Vancouver-area residents from blocking survey work for its Trans Mountain expansion project after protesters stopped crews from working all day Wednesday.
The injunction application is the latest in a bitter battle over KMI’s plans to expand the pipeline through Burnaby Mountain.
Chevron (NYSE:CVX) +1.2% premarket after reporting better than expected Q3 earnings, as lower crude prices boosted refinery operations and helping to offset lower oil and gas production.
Q3 earnings from the upstream segment (E&P), fell 8.7% Y/Y to $4.65B, but downstream earnings surged nearly fourfold to $1.39B as cheaper crude oil prices boosted refining margins.
Q3 production fell nearly 1% to 2.57M boe/day, as higher output from project ramp-ups in the U.S., Argentina, Brazil and Nigeria and improved reliability at Tengizchevroil were more than offset by normal field declines.
The results mirror those from Exxon, which earlier today also reported higher earnings but a drop in production.
Exxon Mobil (NYSE:XOM) +0.9% premarket after reporting better than expected Q3 earnings as strong refining performance offset falling oil prices and production.
Earnings in XOM’s E&P business fell 4.4% Y/Y to $6.42B, hurt by lower production, but refining and marketing earnings jumped 73% to $1.02B, helped by higher refining margins and volume; the chemicals unit posted a $1.2B profit, up 17%.
Oil and gas production fell 4.7% Y/Y - excluding the impact of the expiry of the Abu Dhabi onshore concession, production fell 1% - but XOM says it remains on track for full-year output of 4M boe/day.
Q3 capex fell 6.8% to $9.84B, while share repurchases totaled $3B.