Once I finally got back to Florida Friday after a lovely seven-hour delay courtesy of Frontier Airlines (FRT), I had a pretty quiet weekend, to allow me to recover from the whirlwind of travel, playoff baseball along with some serious wining and dining in the Windy City. I spent much of it catching up on some reading material, including the notes form the Reuters Commodity Summit held last week.
After reading the commentary from the London and Houston meetings, all I can say is, I am really glad I didn't attend any of them. These folks are seriously depressed, especially those in the energy business. No one seems to think oil and gas processing firms are going to recover any time soon, and most of the big oil-related firms are sitting on their cash and doing not much of anything at all.
The CEO of oil trading firm Mercuria Marco Dunand was one of the more bullish traders and he told the Summit that "Most people will agree that by end of next year, we're going to start drawing on stocks and we will still do that in 2017, which over time will trigger a price rally, and I think there's a chance that by the end of next year we might be more likely to be in a $55-type range, to $60 by 2017." Others felt that global demand would not be strong enough to cause drawdowns in oil supplies, and we could see prices just float around the current level. Ian Taylor, the CEO of Vitol, the largest oil trading firm in the world, told Reuters: "Can I see a big run next year? No. If we are above $60 by the end of 2016 I will be a little bit surprised."
Goldman Sachs said this morning that record storage levels of refined products could push oil prices much lower. The investment bank's research department issued a report that said that record refinery output has pushed stored product levels to near record highs, as demand has waned and this "raises the specter of 1998 and 2009, when distillate storage hit capacity, pushing runs and crude oil prices sharply lower."
One of the more interesting presentations came from Greg Reid of Salient, a Houston based investment firm that oversees about $4.5 billion in Master Limited Partnership (MLP) assets. He told the Houston gathering that the sector needed to see some increased merger and acquisition activity, saying that "Our view is that you probably need a lot of consolidation. We need fewer companies, bigger companies that can weather the storm." In the two larger MLP deals announced this year, Wall Street was not really excited, as shares of both the target and the acquirer have fallen in both deals, but Mr. Reid feels that smaller deals may be easier to get done.
MLPs have bounced a bit following an article earlier this month in Barron's that suggested they may be a bargain, but they are still dramatically lower than they were last year. U.S.-based oil infrastructure like pipelines and storage facilities appear to be priced for maximum pessimism at this point. This infrastructure is going to be needed to move and store oil and gas for decades still to come, and it is pretty much irreplaceable. The regulatory and environmental hurdles, along with the prevailing "not in my backyard" attitude that most communities have about these projects, means that building new infrastructure will be a lengthy and expensive process at best. The MLPs that own these assets are starting to look like a solid long-term investment opportunity.
I am not an MLP expert by any stretch of the imagination, and this is an area where I am going to avoid the temptation to prove how smart I am by picking individual names. Fortunately, when I look at the closed-end fund universe, there are several funds specializing in this area that are trading at a decent discount to net asset value. Tortoise Power & Energy Infrastructure Fund (TPZ) is trading at a discount to net asset value of almost 10% and the discount on the Tortoise Pipeline and Energy Fund (TTP) is over 11%. I think that accumulating a position in these funds will pay off for long-term patient investors. If the comments in Barron's by Hinds Howard of CBRE Clarion about MLPs' ability to maintain dividends prove correct, you will also enjoy a generous cash flow while you wait for the value of these assets to be recognized by the market.
Keep in mind that I advocate staying small and moving slow when buying into a beaten-up sector like energy. I scale in, buying big down days rather than just jumping in with both feet. I am also using a very long timeframe and am willing to hold these funds for five years or longer to realize the full value of these irreplaceable energy infrastructure assets.