Commodities Today: Downgrades And Sell-Offs Continue In Energy And Upstream MLP Space

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Includes: BBEPQ, CVX, EVEP-OLD, LNCOQ, LNGG, XOM
by: Matthew Smith

Summary

WTI Crude continues to trend lower as traders worry about excess production and the possibility of fresh lows.

LINE and LNCO have continued to trade lower amid downgrades and price cuts.

Other energy producers could follow the same path as Linn Energy should payouts to shareholders get cut or shelved.

Looking at the board today, commodity prices are mostly higher in early morning trading, with only platinum and silver trading lower. WTI Crude has had a rough go of it lately and now we are seeing some call for $30/barrel oil before year end. Some may say that $30/barrel seems unfathomable, but the truth of the matter is that with all OPEC members, Russia and other producers pumping all out, $30/barrel could be a reality unless OPEC begins to talk up prices. The cartel does not have to necessarily lower production initially, but any type of commentary that would indicate that the cartel is in favor of protecting oil prices would go a long way in this market.

Chart of the Day:

Once again we are looking for a bottom in oil, but with the US producers having cut back considerably, it may be OPEC's turn to take moves to prop up the market before they lose control of the situation.

Source: CNBC

Commodity prices are as follows (at time of submission):

  • Gold: $1,090.70/ounce, up by $1.30/ounce
  • Silver: $14.495/ounce, down by $0.02/ounce
  • Oil: $45.85/barrel, up by $0.68/barrel
  • RBOB Gas: $1.6975/gallon, up by $0.023/gallon
  • Natural Gas: $2.80/MMbtu, up by $0.052/MMbtu
  • Copper: $2.3605/pound, up by $0.0145/pound
  • Platinum: $957.20/ounce, down by $9.90/ounce

Linn Continues To Fall

This past week we discussed our need and desire to hold off on adding exposure to upstream MLPs as we wanted to see how distributions would be affected by the low oil prices and the latest move lower. Although the most recent price action would not have an impact on results, looking forward it would impact operations and we wanted to know just how bad business could get for the industry which uses debt to buy assets and then pays out a healthy portion of cash flow to unit holders. Having been through a number of downturns in the commodity markets, it was prudent in our mind to sit back and wait to see how everything would fall into place.

Our belief was that Linn Energy (LINE), among other names, and by extension LinnCo (LNCO), would be forced to cut distributions once again in order to help finance debt and/or build up cash to prepare for banks updating their credit lines. Simply put, we thought, and continue to believe, that many energy MLPs and companies need to build up cash to make it through this downturn and the easiest way to do so at this point is to stop spending money developing properties and to cut dividends and distributions. The fact that Linn Energy went so far as to suspend their distribution did catch us by surprise, as did EV Energy LP's (NASDAQ:EVEP-OLD) decision to maintain their distribution at current rates.

So why are we revisiting this? Simple, even though it was days ago that Linn Energy made their decision, they are still dealing with the repercussions days later as analysts and investors continue to react to the move in a negative way. So even though right now the focus is on Linn Energy and LinnCo, investors might want to be looking at other upstream MLPs and even the mid-major oil companies. ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX) did not report inspiring results last week and that should also be a warning to readers that there are few places to hide in this market right now.

Even though Breitburn Energy Partners (BBEP) announced their distribution late last week, investors and analysts continue to look at the MLP as a likely candidate to decrease its distribution in the near future as it is similar in many regards to Linn Energy. Time will tell, but the units continue to trend lower and hit fresh lows.

Disclosure: I am/we are long EVEP.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.