By Managing Director and Portfolio Manager Brian Kessens
Tough love for energy last week, as broad energy fell 3% and MLPs dropped -3.6% (with lots of dividend ex-dates). Producers brought up the rear, declining 6.4%.
Crude oil prices were no help, slipping 4.6%, though crude oil inventory data continues to be constructive as petroleum stockpiles came in smaller than expected. In fact, U.S. gasoline demand over the last four weeks is the highest for the period since 2007. Weighing on crude oil prices were U.S.-China trade talk uncertainty and lower eurozone GDP forecasts. Furthermore, the U.S. House Judiciary Committee passed a bill that would allow the Justice Department to sue OPEC, citing antitrust laws. We don’t expect the NOPEC (or No Oil Producing and Exporting Cartels Act) to pass the full legislative and executive branches, yet it throws some sand into the wheels of OPEC transparently cooperating to stabilize the oil market.
Moving to earnings reports, producer commentary is driven by 2019 capital expenditure outlooks. The trend to trim continues, with Apache Corp. (APA), Carrizo (CRZO), Suncor (SU), Southwestern (SWN) and WPX Energy (WPX) all announcing lower 2019 capex versus 2018. All in so far, capital spending is expected to fall about 4% year over year. Rhetoric consistently points to generating disciplined production growth within cash flow over the long term, in a mid-$50s oil price environment. Stock buybacks remain en vogue, including from the two largest producers reporting last week. Anadarko Petroleum Corp. (APC) indicated continuation of its $1.25 billion buyback, and Suncor noted it expects to complete a C$3 billion buyback soon, with an additional C$2 billion repurchase authorized.
Midstream companies' earnings expectations were relatively high after consistently beating throughout 2018. Numbers of the largest crude oil transporter, Plains All American Pipeline (PAA), were a beat, driven by the company’s supply and logistics segment. Plains guided 2019 2% lower, indicating an expectation for lower producer budgets and narrower Midland to WTI differentials. The next two largest midstreamers to report were mixed. Phillips 66 Partners (PSXP) beat following strong volumes across its crude, refined product and NGL pipelines and terminals. Next up, expect an IDR restructuring announcement sooner than later. MPLX missed, mostly due to unplanned downtime at its Houston, PA, processing complex. Management emphasized a long-haul crude oil pipeline strategy with its Capline and Swordfish projects. It is also to be determined yet if its Permian Gulf Coast pipeline project gets combined with the Exxon (XOM)-Plains joint venture.
Two refiners reported last week, Marathon Petroleum (MPC) and Phillips 66 (PSX) - both positive, as refining margins benefited from wide Canadian and inland crude oil prices. Retail marketing also surprised to the upside, as the declining oil price in the 4th quarter led to high fuel margins. Returning cash to shareholders via buybacks continued, with MPC buying back $675 million in stock and PSX buying back nearly $500 million. 2019 outlooks rest upon crude oil price differentials and the impact of IMO 2020.
We’ve talked about the need for LNG exports at length, and there was a big update last week. Exxon Mobil and Qatar Petroleum officially announced an FID (or final investment decision) for their Golden Pass export facility in Port Arthur, Texas. The $10 billion facility is targeting a 2024 in-service date. There is now 3.3 Bcf/d of LNG capacity in service, with another 10 Bcf/d under construction in the U.S. For perspective, if on-line today, this LNG capacity would demand about 15% of total U.S. supply - very meaningful. We think the Golden Pass FID may be the start of a second wave of U.S. LNG projects moving forward with construction. Stay tuned.
February 11 was the birthday of Thomas Edison, arguably the man who did the most for energy that ever lived. He noted, “Just because something doesn’t do what you planned it to do doesn’t mean it’s useless.” The increasing capital discipline that continued last week has yet to have an outsized impact on stock prices. We maintain that this is the right approach and it will ultimately prove most useful. Edison was also known for his perseverance and patience.
Fourth-quarter earnings continue in a big way this week, and there is a large energy conference in Vail, CO. And of course, Thursday is Valentine’s Day. Talk to you next week about whether Cupid’s arrow hit the energy market with some love.
The S&P 500® Index is a market-value weighted index of equity securities.
The PCE inflation rate is the Personal Consumption Expenditures Price Index. It measures price changes for household goods and services. Increases in the PCEPI warn of inflation while decreases indicate deflation.
Broad Energy = The S&P Energy Select Sector® Index is a capitalization-weighted index of S&P 500® Index companies in the energy sector involved in the development or production of energy products.
Producers = Tortoise North American Oil & Gas Producers IndexSM
The Tortoise North American Oil & Gas Producers IndexSM is a float-adjusted, capitalization weighted index of North American energy companies primarily engaged in the production of crude oil, condensate, natural gas or natural gas liquids (NGLs). The index includes exploration and production companies structured as corporations, limited liability companies and master limited partnerships but excludes United States royalty trusts.
MLPs = The Tortoise MLP Index® is a float-adjusted, capitalization weighted index of energy master limited partnerships (MLPs). The index is comprised of publicly traded companies organized in the form of limited partnerships or limited liability companies engaged in transportation, production, processing and/or storage of energy commodities.
The indices are the exclusive property of Tortoise Index Solutions, LLC, which has contracted with S&P Opco, LLC (a subsidiary of S&P Dow Jones Indices LLC) (“S&P Dow Jones Indices”) to calculate and maintain the Tortoise MLP Index®, Tortoise North American Pipeline IndexSM and Tortoise North American Oil and Gas Producers IndexSM (each an “Index”). S&P® is a registered trademark of Standard & Poor’s Financial Services LLC (“SPFS”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and, these trademarks have been licensed to S&P Dow Jones Indices. “Calculated by S&P Dow Jones Indices” and its related stylized mark(s) have been licensed for use by Tortoise Index Solutions, LLC and its affiliates. Neither S&P Dow Jones Indices, SPFS, Dow Jones nor any of their affiliates sponsor and promote the Index and none shall be liable for any errors or omissions in calculating the Index.
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