Perhaps the best indication of the health of the energy markets is the fullness of the inbox at my business e-mail address. In recent weeks I have observed a decided uptick in the number of e-mails I have received from energy companies and their public relations partners. Hitting -- and holding -- $70 per barrel on West Texas Intermediate crude seems to have been the catalyst for company managements to once again market their stories. Having lived through the experience of the 2014 bust, those lessons are driving my investing as we experience the 2018 boom.
Make no mistake, this is a boom. The front-month crude oil futures price has risen 18.1% thus far in 2018 and now sits 44.6% above its level of one year ago. That's a bull market, and if the financial media has not fully jumped on the bandwagon -- there's always some tidbit of FAANG news or Elon Musk celebrity sighting to report on instead -- that does not make the profitability disappear.
So, the first lesson from the days of the 2013-2014 oil boom is: make sure you have exposure to energy names. This is the fat part of the cycle for oil producers and with incremental production generating cash flows at well above the cost to produce, the stocks should be more highly valued. To a certain extent that has happened, with the (XLE) sector ETF positing an 8% gain thus far this year versus and 1.9% gain for the S&P 500. In looking at individual names, though, I have observed that valuations are still nowhere where they were before oil's crash in the fourth quarter of 2014. It is via the individual names, not the ETFs, where the money will be made from the 2018 boom.
The second lesson: not all carbon-based fuels are equal. Do 15 minutes of research and make sure your energy sector exposure is to the companies that are benefiting directly from higher oil prices. It's frustrating to me as a long-term structural bull, but, in contrast to black oil, natural gas prices are just not performing. At $2.86/mmBTU today, natgas prices have recovered from February's ridiculously low level of $2.55, but still sit well below the year-ago figure of $3.18. So, make sure your energy plays have exposure to oil and natural gas liquids (which, despite their appellation, actually are priced based on oil prices not natgas prices), as opposed to pure natural gas plays. I believe there is enormous value in the major gas-only drillers like Range Resources RRC, Antero Resources AR and EQT EQT, but if you own those names you need to be very, very patient, and be prepared for them to underperform their oil-based brethren if the current commodity pricing structure holds.
The third lesson: If it sounds too good to be true, it probably is. This is true of any stock, but the pitches I receive for emerging energy companies tend to be hyperbolic in nature. The companies I have been recommending -- including in my column yesterday -- have shown the financial and management wherewithal to survive a downturn. The most recent oil crash really was not that long ago, so I hope no one has forgotten. The four companies I have been recommending in my RM columns -- Gastar Exploration (GST) , Sanchez Energy (SN) , Evolution Petroleum (EPM) and Denbury Resources (DNR) -- are not just survivors of the bust, but should be major beneficiaries of the boom. Other companies did not make it, and if the company (or its management) of the stock you are considering purchasing was in any way connected with a bankruptcy in the 2015-2016 depths of oil's depression, I would avoid purchase of those shares.