As a professional trader, I depend on having a plan. One of the only things that sets me apart and gives me any advantage in my energy-investing decisions is the plan that I devise. You need one too.
I cannot stand investment advice that is based on, for example, the reading and analysis of corporate reports -- the most ubiquitous and "known knowns" of investing information -- which I've found, nearly useless in practice. If everyone's got it, it's got to be worthless. That's what I believe.
In the energy sector, my plan has been well documented in my book and I again invite you to read it. From a macro standpoint in the timeline that I laid out, we are in the final 12-month throes of the oil bust cycle. That means that although there are likely several quarters to go before oil companies again become profitable and growth candidates, the stocks will begin to react to that upcoming turnaround.
In fact, I believe that has already begun.
Inside the energy sector are several sub-sectors that will move at different rates of speed in this recovery process. I have focused mostly on the ones that I believe will make the return move first: the independent exploration and production companies (E&Ps). But in making your own plan for investing in the energy space, you need to know where your money will do the most good, in the quickest manner. So here's an overview on what I believe will be the staggered return profile for some of the major energy sub-sectors. From this, you'll be better able to craft your own "timetable" for investment.
1. Domestic Independent Exploration & Production: There is a strange dichotomy in this sub-sector where we'll actually see companies get restructured and common shares become nearly worthless, while others begin to increase their share prices three- or four-fold. But seeing some in this sector going broke is not an indictment of the group; on the contrary, the weeding out of the weakest players only makes room for the strongest to dominate. Halcon Resources (HK), SandRidge Energy (SD), Exco Resources (XCO), Oasis Petroleum (OAS), Sanchez Energy (SN) and a host of others that are destined to be "chastened' in some major way will only help the ultimate prospects of Action Alerts PLUS holding EOG Resources (EOG), Cimarex Energy (XEC), Hess (HES), Anadarko Petroleum (ADC), Devon Energy (DVN) and a few others. But these are the ones that will be the early beneficiaries of the coming new oil boom.
2. Oil Services: These companies will be second to benefit from the revitalization of U.S. independents. I wouldn't hesitate to distinguish in this sub-sector, as we did for E&Ps, that those that concentrate on onshore fracking (like Helmerich & Payne (HP)) will surely be last to recover as compared to full-service providers such as Schlumberger (SLB).
3. Offshore Drilling: The down cycle in offshore drilling still has every indication of lasting longer than for just about every other energy sub-sector. The plus side of this is the deep values that are being seen in this space. While they are likely to be very late to the recovery, those that survive should experience exponential share growth.
4. Infrastructure MLPs: Lower production targets for the U.S. in both oil and natural gas make the MLPs one of the most difficult investment areas for anyone. Add the fact that interest rates are destined to go higher and you've got a sub-sector that has been floating on air for quite a while already, before the massive collapse of the group last month. I advised readers to stay away from these names for nearly two years, and even with this collapse, I don't recommend buying anything, save for one: Kinder Morgan (KMI) -- and it's not even an MLP anymore.
5. Refining: With ultimately rising oil prices, lower domestic production, rising interest rates and a possible crude oil export ban being repealed, there is no worse sub-sector of energy to be in than the refiners. I'm sure somewhere there may be something worth buying for the short-term, but I'm not even wasting my time attempting to find it. Too much of the coming macro environment is against these names.
Notice that is not a "buy this stock at this price" kind of column. I specifically wanted to point out my macro plan for investing and leave the micro (and very critical) choices of which stock and which price to you.
It is from your plan that your profits must ultimately come.
