I am attending the Independent Petroleum Association of America's Oil and Gas Investment Symposium (OGIS for short) this week in New York City. I wandered absent-mindedly into a presentation for Memorial Resource Development (MRD) and found a standing-room-only crowd. People were quite literally lining the walls of the conference room to hear MRD's presentation.
Memorial's assets lie in the Cotton Valley trend primarily in Northern Louisiana, and the company also has exposure to East Texas through Memorial's embedded production master limited partnership (MLP).
In short, Memorial has solid assets, but is nothing to write home about ... and yet there weren't even close to enough seats for investors at its presentation. That, as any poker player would confirm, is a "tell." This market has been so desperately, maniacally short oil and oil-producing equities that even a small rally makes formerly discarded names into hot stories.
So, that's an indication of the extremely high level of interest in exploration and production companies as oil prices have jumped in the last two days, with West Texas Intermediate crude front-month futures blasting through the $40-a-barrel mark today. I heard many differing opinions at the conference on the near-term future for WTI and its ability to hold the $40 mark, but investors are clearly intrigued by the potential of an oil price rally, even if they're not totally convinced.
Memorial shares have risen 17% in the past month but are still down 28% year to date. Remember, this is a $2.5-billion market capitalization company I am writing about, not some mom-and-pop wildcatting outfit. The volatility has been so intense and so pronounced in oil futures that some investors seem to have developed itchy trigger fingers.
My advice: put some calamine on your trigger finger, and, for goodness' sake, just let it ride. The S&P 500 is up less than one-half of one percent in 2016, and it fell by a similar amount for 2015. We're in this wishy-washy cycle of mini ups and downs, so if you're holding a hot exploration-and-production name here, the last thing you should be doing is selling.
That said, an investor might be looking for exposure to oil and gas without the volatility, and believe it or not, such stocks exist. My favorite is Evolution Petroleum (EPM).
Evolution owns a 26.4% net revenue interest in the Delhi Field in Louisiana, which is operated by partner Denbury Resources (DNR) using a CO2 flood -- a tertiary method of oil recovery. Denbury is building a natural gas liquids plant at Delhi that greatly will improve field hydrocarbon recovery, and after the plant is finished the ongoing capital expenditures will be quite minimal.
Most importantly, Evolution Petroleum has no debt. One might hear such a simple sentence at OGIS and become confused by all the balance sheet jargon thrown out by other companies -- "we have no short-term maturities, no bonds that have recourse to the parent or are encumbered by" ... etc., etc. In Evolution's case, there is no such confusion. The company simply has no debt.
Evolution has continued paying dividends through the downturn; its dividend rate is five cents per quarter, indicating an annual yield of 3.94%. It also has a preferred (which I've mentioned many times in my Real Money columns), EPM.A, that is trading above par and currently yielding 8.3%.
EPM CEO Randy Keys indicated in today's meeting that the company is continuing to opportunistically hedge current-quarter production, but leaving the door open in future quarters in case this price recovery continues. EPM also continues to sift through a myriad of potential acquisition opportunities in what is indisputably a buyer's market. The company's debt-free balance sheet puts it in a unique position to lock in high returns by buying undervalued producing assets.
I believe that's the proper strategy, and I believe EPM and EPM.A are the perfect antidotes to oil stock volatility.