As stocks recover somewhat on Thursday from their brutal October, there has been no such relief in the oil pits. As of this writing, front-month (December 2018) WTI crude futures are trading down $1.80 to $63.50 per barrel and Brent futures are trading down more than two dollars a barrel at $72.82. WTI prices fell 9% in October and Brent actually exceeded the Nasdaq's loss for the month, posting an 11% decline. As U.S. crude production hit record levels again last week and the market attempts to figure out the impact of U.S sanctions on Iran--scheduled to take effect Sunday--I am, as usual, focused on a different metric than most observers.
An old friend has returned, albeit tentatively, to the oil markets. Yes, we are back in contango, if only slightly. Contango is the situation in which contracts for future months' delivery are valued more highly than the contract for current month's delivery. Since oil has a physical price to store it, ($0.50 per month is an industry benchmark,) contango is the natural state of affairs, in my opinion, although there is some debate on that. The situation of an inverted curve, known as backwardation, tends to occur when there is heightened concern about the global oil production complex's ability to supply near-term needs. That oil production is volatile and dependent on geopolitical factors is not debatable, however, and the crude oil futures curve started to backwardate at year-end 2017 and held that shape through most of 2018.
The prior period of contango began just after the disastrous (for oil bulls, anyway) OPEC meeting of Thanksgiving 2014 and lasted for more than four years. While the oil futures curve is just barely in an upward sloping condition today (December 2019's contract is more expensive than December 2018's by all of a nickel) I believe that the markets are re-entering a phase where the time value of money is accurately reflected in commodity pricing. The risk of short-term production shocks seems to be waning, as Saudi Arabia has thus far escaped sanctions despite handling the Khashoggi killing in the stupidest manner possible, so I am planning on the assumption that contango will once again prevail.
In that pricing scenario, companies that transport and store crude oil and its refined products will benefit. The obvious winner in such a scenario is the oil tanker industry, as those ships are used to both transport and store (a practice known as floating storage) crude oil. I have mentioned names such as Navios Maritime Acquisition (NM) , Euronav (EURN) , Nordic American Tankers (NAT) , Navios Midstream Parters (NAP) and Teekay Tankers (TNK) in my RM column before, and all those stocks have jumped in Thursday trading.
A less obvious name, and one that has demonstrated less volatility than the wild and wooly tanker stocks, is Global Partners, LP (GLP) . Global is an MLP that operates one of the largest petroleum products terminal networks in the Northeast U.S as well as transporting crude by rail through the U.S. and Canada, supplying wholesale customers with petroleum products and owning and/or operating a network of 1,600 gas stations throughout the Northeast. So, Global touches oil and gas at several steps along the value chain, and as the time value of that chain increases, so does Global's franchise value.
Global measures very well on the key investing metrics (see below,) but the only caveat is its status as an MLP. If you think rates are going to rise quickly and significantly--to above 4% on the U.S. 10-Year Treasury note for instance--then Global is not the name for you nor is any other MLP. If you think the current interest rate regime of a flat curve with the 10-year holding between 3.0% and 3.25% is going to hold, however, Global is an excellent way to play the surging U.S economy.
Global Partners L.P.
Market Cap: $700 million
Quarterly distribution: $0.475 (increased from $0.4625 beginning with 2Q2018's payment)
Current yield: 9.2%
2018 EBITDA Guidance range: $190-$215 million (increased from a prior range of $180-$210mm in August's earnings release)
Coverage ratio (distributable cash flow/distributions) 1H2018: 3.2x
Next earnings date: November 8