This week's IPAA Oil and Gas Industry Symposium in New York was a lollapalooza of energy exploration and production companies. Many of the presentations, especially the crucial breakout sessions, were standing room only. Investors have been circling energy stocks looking for bargains, but I see more due diligence than actual buying.
What's going to make fund managers shift their E&P strategy from shopping to buying?
Oil prices, as measured by West Texas Intermediate crude prices, need to break through and sustainably hold the $60/barrel mark. The hallmarks are there: Brent crude prices passed through the $65/barrel this morning, and remember, it was Brent pricing -- WTI followed -- that led the crude collapse last summer. Also, the forward curve for WTI is still showing a strong upward bias. I'm seeing WTI June contracts (the front-month expiration) quoted at $56.84 as I am writing this, but January 2016 WTI is quoted at $62.20. So the oil market is solidly in contango, and the futures curve is telling us that oil prices will continue to improve for the next six months.
Most of the presentations I attended at OGIS included a CEO forecast of improving WTI prices for the second half of this year. While E&Ps, especially smaller ones, are by definition price-takers, futures markets work on consensus, and there does seem to be one building that the second half of 2015 will see a continuation of the rally in oil prices that began in mid-March.
Managements need to focus on liquidity. I have a recurring dream in which CEOs of the companies in which my firm owns preferred shares begin their presentations with a slide on current liquidity, followed by a slide on actions taken to improve liquidity, followed by a slide on actions contemplated to improve liquidity.
It doesn't happen that way, and thus, I'll have to continue attending these conferences until the "world runs out of oil." Hydraulic fracturing and horizontal drilling have made that concept as laughably stupid as the fanatics who fight energy development and, really, human progress of any kind. But extracting hydrocarbons requires access to capital, and that has been a tough sell the past six months.
I have better things to do than traipse all over creation asking the same questions to the same E&P CEOs.
But the vast majority of my managed assets are in an income-based strategy, and I am seeing the S&P 500 dividend yield quoted today at 1.93%, exactly the yield at which I am seeing the 10-Year U.S. Treasury note quoted.
So, in today's markets, income generation requires the assumption of risk.
I use a weekly screening service to navigate the vast market for preferred stocks in the U.S. As of this morning's report, the nine highest-yielding preferreds were issued by energy companies, with yields ranging from a "low" of 12.14% for GreenHunter Resources' (GRH) Series C preferred to a high of 28.88% for Miller Energy Resources' (MILL) Series D preferred.
So there's just no way to be a high-yield investor now and not spend a significant time on the energy sector. Many other OGIS attendees were doing that along with me.
The key is the creditworthiness of the individual companies, and that is what keeps me busy. I'll start a series on Monday going through the individual companies (including the two I mentioned above) that presented at OGIS and have preferred issues, and throw in a couple of non-preferred issuing potential home-run micro-cap common stocks as well.