Last week we held the monthly joint web chat for subscribers of The Energy Strategist (TES) and MLP Profits (MLPP). The chat is conducted by Igor Greenwald, who is managing editor for TES and chief investment strategist for MLPP, and myself. We got to most of the questions during this session, but there were a few that required an extended answer, or a bit more research. Below I will address remaining energy sector questions from the chat. For answers to some remaining MLP questions from the chat, see this week’s MLP Investing Insider.
Q: WMB has been weak for some time. Do you see a chance for price appreciation?Williams (NYSE: WMB) maintains a leading gathering position in the fast-growing drilling operations in the US Northeast, gathering and petrochemical assets on the Gulf Coast and in the Gulf of Mexico, a key pipeline linking the Northeast to the Gulf Coast, Mid-Continent gathering, processing and pipeline assets, and some interests in Canada.
WMB currently yields 3.7 percent and the company projects that the dividend will increase 20 percent in each of the next two years. While shares did trade in a narrow range for most of the second half of 2013, their price began to climb in early December and has risen more than 11 percent in the past six weeks, aided by calls for better shareholder returns from hedge fund investors. The stock has returned 13.4 percent since it was recommended in The Energy Strategist on Oct. 9. We believe WMB is ideally positioned for linking the Marcellus and Utica shales with the major eastern US population centers and gas consumption hubs, and hence expect additional price appreciation.
Q: What are your thoughts on Pembina going forward?
Pembina Pipeline (NYSE: PBA, TSE: PPL) is a Canadian company that owns and operates pipelines that transport crude oil and natural gas liquids produced in Western Canada. Pembina initially operated as an income trust in 1997 when it went public on the Toronto Stock Exchange, but converted to a corporation in 2010. Since the conversion the company has experienced consistent growth and shares currently yield 4.8 percent.
The company is well-positioned for growth as Alberta’s oil production expands, and it shouldn’t have trouble maintaining and slowly growing its dividend over time since the bulk of its business is fee-based — as is the case with most US-based midstream master limited partnerships (MLPs). The company could be a low-risk option for an investor seeking income, with the caveat that Canadian midstream companies don’t enjoy the same tax treatment as an MLP. Thus, long-term performance may lag relative to a similarly-positioned partnership in the US.
Q: What is your opinion on Halcon Resources?
Halcon Resources (NYSE: HK) is an upstream oil and gas producer with operations focused in the Bakken in North Dakota, the Utica in Ohio and Pennsylvania, and in the Eagle Ford in Texas. Over the past two years shares of the company have been on a steady decline, falling 71 percent.
A big knock on Halcon is that it significantly overpaid for its Utica acreage and that its relatively high level of debt will make it difficult to climb out of the hole they dug for themselves. I believe the share price will turn up this year, but I would wait on the sidelines for now as it still seems to be seeking a bottom. With this much downward momentum and bad news, it would be a really speculative play until it is clear that the company has turned the corner. At present, that isn’t the case.
Q: Could you offer any insight/comment on Swift Energy, which seems to be moving towards oil from natgas?
Swift Energy (NYSE: SFY) is an oil and gas producer with operations primarily in Texas and Louisiana. Like Halcon, the company’s share price has been battered over the past two years, down 61 percent, but unlike Halcon, Swift seemed to turn a corner in the second half of 2013. In comparing the two, Swift is in better shape financially (less leveraged and a better cash flow position) and has less downside risk. Swift has done a good job of growing both oil and gas reserves, as well as production in the Eagle Ford.
Swift’s production has grown while the share price has languished. Source: Swift Presentation
Swift looks like a good value at this level.
Q: Do you expect the recent news of a GLOG spinoff would slow down the growth in GLOG as they split the company into a common stock and an MLP? How much of the anticipated growth would move to the MLP?
GasLog (NYSE: GLOG) owns 15 LNG carriers, with eight ships on the water and seven more to be delivered by 2016. The company is one that we have liked and recommended, and it performed well in 2013, up 33 percent for the year. It has long been thought that the company might drop down assets into an MLP, but last week’s news that this will indeed be the case helped propel the stock up nearly 20 percent for the week.
GasLog has yet to release details of how the MLP will be structured, but the company obviously believes that the move will unlock value. The MLP assets will probably trade at a premium to GasLog’s recent valuation, but of course GasLog has already made a move up in anticipation of this deal unlocking value for shareholders.
We like GasLog fundamentally, and have covered it in depth in The Energy Strategist. If you already own it, congratulations now that your return is up to 61 percent over the last 12 months. But with recent news driving prices significantly higher, I would be wary of initiating a position at this point.
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