Filling Out Your Energy Bracket

 | Mar 23, 2013 | 6:00 PM EDT
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It's March Madness time, and in that spirit let's try to organize our energy investing thoughts the way we try to pick our brackets and find our winners.  OK, this may be a bit corny, but it's actually pretty close to the way I do it and have done it for years.

Inside the draft this year, there are obviously going to be stronger regions and inside those regions even stronger segments. Finally, inside those segments, there will be powerhouses you imagine you can bank on and dark horses you think are being overlooked. That's not unlike the way to look at the energy sector in choosing your investments.

Divisions might represent sectors inside the energy world, like Exploration and Production, Oil Services, Refining, Natural Gas and perhaps Transport. Inside each of those sectors could be mega-caps that are broad-based compared to those that are smaller and look to concentrate on more specialized markets.

Now, I could spend many columns dissecting even one of these sectors, trying to coax the winners that I think are going to move along in the tournament from the losers destined to go back home to regroup. But a couple of more generic ideas should help you organize your bracket picks.

First, help yourself by concentrating in those divisions that look to have the fundamental tailwinds behind them this year. To me, with the steady and constructive price of global crude this year, E+P is a likely bracket in which we will find advancing teams. Refining -- with the strong U.S. margin differential that has so far maintained itself this year -- is another place to begin a search for winners. 

In natural gas, with prices still under $4/mmbtu, you're less likely to find a Final Four team, not that they don't exist. There are plenty of moments when stocks for natural gas companies with reasonable fundamentals and long-term outlooks are just viewed far too pessimistically by the Street and represent a great value. But on balance, you're less likely to find a winner in that sector given the fundamentals of the market, for at least this year's tournament. 

Of course, the most fun when making out your hoops bracket is in picking those dark horses not expected by the crowd to do well. But there is always one or two that will surprise everyone and get to the round of 32 or further.  Those speculative stocks exist in the energy sector as well and they can be the most thrilling when you find them, and the most profitable. But finding them almost always requires a deep knowledge of the team and, like the basketball tourney, more than a little bit of luck. 

There's room for these picks, but a bracket full of them is more than likely to lead to disappointment -- that's my point. In structuring a winning bracket, like structuring a winning energy portfolio, you'll do better in the long run by tempering your choice of flyers with a heavy dose of powerhouses who've proven themselves to be worthy of their top seeding.

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