For my final two columns of the year, I'll look back at 2014 and dissect the winners (and losers), as well as try to find some "best ideas" in the energy space for the coming year.
In general, 2014 was a tough year for the energy and commodity space, and it wasn't merely due to the collapse in oil prices in the second half. With production in the U.S. moving forward at a breakneck pace and an oil price that stayed above $100 a barrel until June, there should have been dozens of opportunities for outsized gains in the early part of the year, at least. Instead, we found that we had to be incredibly cagey about where to invest in oil and gas producers and we made some with good trades in names such as Cimarex (XEC) and Noble Energy (NBL).
But I think my best work in 2014 was staying away from the areas where money was likely to be lost. I completely avoided the dedicated natural gas producers, assessing correctly that oversupply and depressed prices would continue through the year, despite the fact that efficiencies were again increasing in the space. I shunned offshore drillers, correctly seeing that the down cycle would continue, even at $100 oil, and also generally steered clear of the diversified services names, except for mentioning the most dedicated to booming horizontal drilling, such as Helmerich & Payne (HP). I distinctly avoided coal, copper and solar.
As Sinatra would say though: "Regrets, I've had a few," and not too few to mention. Even in the exploration and production space, I came up with some howlers, like my near the top recommendation of Apache (APA), getting fooled by a best-in-sector price-to-earnings ratio and ignoring their double down in U.S. production at precisely the wrong time. Other companies that also invested big in U.S. shale in the summer of 2014, like Encana (ECA), will find 2015 exceedingly disappointing as well, in my view.
But nothing exceeded my mis-call of oil itself in the fall. I believed that a drop in price would be bounded by the lows of 2013 and the long-term trendline begun in 2009. I waited patiently for oil to drop to $82 before recommending several E&Ps I thought I would never again see at such bargain prices, only to watch as oil plummeted another $25, and the stocks with them. On the plus side to these recommendations in Anadarko (APC) at $90, EOG Resources (EOG) at $100 and Cimarex at $115, these shares have proven themselves to be the most resilient of the sector and are really not that far removed from where I touted them-- a small consolation.
One other plus is my quick turnaround on oil once the bottom began to drop out and my steady caution against bottom-fishing the weaker E&Ps that had lost more than 50% of their value from their highs; names like SandRidge Energy (SD), Halcon Resources (HK), Goodrich Petroleum (GDP), Emerald Oil (EOX), American Eagle Energy (AMZG), Oasis Petroleum (OAS), Northern Oil and Gas (NOG) and more. I believe I've saved readers from a lot of heartache in avoiding names that looked cheap, but continue to get much cheaper. And 2015 should be a very trying year for all of these names and more as a new era of consolidation and outright bankruptcy will likely dominate. Amid this, there will be opportunity -- but let's wait for the new year to arrive to try and find those values.
If all of this makes 2015 look like an even tougher year for the energy and commodity space, take heart. I think in many ways 2015 will look like 2014 inverted: a slow start followed by a much more rousing finish. And that's where we'll begin Thursday's column.
