Recently, I had written a column outlining the three strongest energy trends: the rising cost of a barrel of crude oil, the advantage of U.S. energy to other global players, and the opportunity of continuing low natural gas prices. I asked for ideas from readers on where the best investments from those trends might be, because I have been hard-pressed to find great ones myself. The response has been heartening.
This is my favorite kind of column, because I get to critique some of my loyal readers as if they were the energy expert. Many of you have shown you are, by presenting well thought-out ideas. One single idea excites me for the very long term: the opportunity in upstream infrastructure.
Paul went for an interesting choice with offshore players. With a rising price for crude, he reasons that the value will ultimately return to deep-water extraction, enlivening a battered off-cycle subsector. These thoughts inspired my tepid recommendation of Transocean (RIG) several weeks ago, although I send you into this dog with the full knowledge that the cycle in offshore is unlikely to clear for at least another year. I expect a quicker recovery in oil prices than that. My recommendation mostly hinged upon the dividend, not necessarily upon the rising price of crude. As a high-alpha very-long-term dividend play, I can bless Transocean or Paul's choice of Ensco (ESV), but only in that light.
Peter had an interesting take on U.S. exploration and production (E&P) companies. U.S. Silica (SLCA), a company that has held a near-monopoly advantage on fracking sand. This momentum stock lagged for much of 2013, and all of a sudden, it seemed to have the 'secret sauce' in fracking. This is similar to the way Helmerich and Payne (HP) seemed to have a leg up on the competition in horizontal drilling tricks. I will take a 'nolo contendere (I do not wish to contend)' stance on U.S. Silica as I did on Helmerich and Payne. I don't understand how these companies have developed technology or processes that annihilate the competition, but at $63 and a 40 forward P/E, I can't recommend or buy U.S. Silica. That probably means that Peter is right and it's headed higher. Well done, Peter.
Alan went where I would like to go, in upstream infrastructure. Almost every recent miss suffered by a U.S. E&P company has one constant theme -- a shortage of pipelines to take product to market. It has been driving the $5-discount of Permian oil to WTI oil, which is at another $6 discount to global prices. It inspired the Noble Energy (NBL) miss, forced flaring in the Bakken, and caused the concurrent regulation that slows crude production there.
As pipeline companies look to build further into the shale plays, their capacity will gain even greater premiums, as E&Ps will have to fight to secure capacity for their production. In every casino, there is one consistent winner, and that's the house. In the energy world, the pipeline Master Limited Partnerships (MLP) are currently the collecting house players.
Alan plumped for Breitburn Energy Partners (BBEP), but I'll suggest Kinder Morgan (KMI), the stock Cynthia has come up with. Its recent return to a C corp. from long MLP standing is a brilliant move from a brilliant pipeline operator. Kinder Morgan's recent underperformance is an opportunity to get a great pipeline company at a relative value.
Thanks for the letters and ideas. You have shown me how intense and smart you are about the energy space. Nevertheless, I want to bet with the house.