Energy Sector

[rb]

I own some WMB, which I consider undervalued, despite the noise around bankruptcies impacting their G&P operations. I like EPD, but I don’t like dealing with MLP, unless I absolutely have to and I am willing to make a larger and long term commitment. For me PSX is the most interesting as their midstream and chemical business becomes a larger part of their cash stream, yet it still is largely valued as a refiner. it has the Buffet seal of approval (despite the fact that he exited) and their share buybacks truly identify it as a cannibal. In the CC, they mentioned that thy have ~900M annual EBITDA thwt could be dropped down into their MLP. Do this at 10x EBITDA while the stock trades at 7x and we are talking about serious value accreditation.

Why don't you like MLPs? Is it just the tax implications or are there other issues?

[Spekulatius]

I own some WMB, which I consider undervalued, despite the noise around bankruptcies impacting their G&P operations. I like EPD, but I don’t like dealing with MLP, unless I absolutely have to and I am willing to make a larger and long term commitment. For me PSX is the most interesting as their midstream and chemical business becomes a larger part of their cash stream, yet it still is largely valued as a refiner. it has the Buffet seal of approval (despite the fact that he exited) and their share buybacks truly identify it as a cannibal. In the CC, they mentioned that thy have ~900M annual EBITDA thwt could be dropped down into their MLP. Do this at 10x EBITDA while the stock trades at 7x and we are talking about serious value accreditation.

Why don't you like MLPs? Is it just the tax implications or are there other issues?

 

I prefer c-Corp over MLP mostly due to ease of dealing with them (no K-1). Energy and even midstream is cyclical and volatile, so one can benefit from buying and selling at the “right time “. MLP are a pain in the butt when dealing with partial sales, distribution recapture etc. Also, 60% + of my assets are in tax deferred accounts, which are no-go for MLP (UBTI concern).

I would consider an MLP (and indeed own one) for a long term holding only, preferably something I never intend to sell. I think only EPD is really of high enough quality and even there are rumbling about converting to a c-Corp.

[DooDiligence]

I own some WMB, which I consider undervalued, despite the noise around bankruptcies impacting their G&P operations. I like EPD, but I don’t like dealing with MLP, unless I absolutely have to and I am willing to make a larger and long term commitment. For me PSX is the most interesting as their midstream and chemical business becomes a larger part of their cash stream, yet it still is largely valued as a refiner. it has the Buffet seal of approval (despite the fact that he exited) and their share buybacks truly identify it as a cannibal. In the CC, they mentioned that thy have ~900M annual EBITDA thwt could be dropped down into their MLP. Do this at 10x EBITDA while the stock trades at 7x and we are talking about serious value accreditation.

Why don't you like MLPs? Is it just the tax implications or are there other issues?

 

I prefer c-Corp over MLP mostly due to ease of dealing with them (no K-1). Energy and even midstream is cyclical and volatile, so one can benefit from buying and selling at the “right time “. MLP are a pain in the butt when dealing with partial sales, distribution recapture etc. Also, 60% + of my assets are in tax deferred accounts, which are no-go for MLP (UBTI concern).

I would consider an MLP (and indeed own one) for a long term holding only, preferably something I never intend to sell. I think only EPD is really of high enough quality and even there are rumbling about converting to a c-Corp.

 

Are you forced to sell & pay the taxes in a C corp conversion?

 

Why would they consider such a move?

[Lance]

I own some WMB, which I consider undervalued, despite the noise around bankruptcies impacting their G&P operations. I like EPD, but I don’t like dealing with MLP, unless I absolutely have to and I am willing to make a larger and long term commitment. For me PSX is the most interesting as their midstream and chemical business becomes a larger part of their cash stream, yet it still is largely valued as a refiner. it has the Buffet seal of approval (despite the fact that he exited) and their share buybacks truly identify it as a cannibal. In the CC, they mentioned that thy have ~900M annual EBITDA thwt could be dropped down into their MLP. Do this at 10x EBITDA while the stock trades at 7x and we are talking about serious value accreditation.

Why don't you like MLPs? Is it just the tax implications or are there other issues?

 

I prefer c-Corp over MLP mostly due to ease of dealing with them (no K-1). Energy and even midstream is cyclical and volatile, so one can benefit from buying and selling at the “right time “. MLP are a pain in the butt when dealing with partial sales, distribution recapture etc. Also, 60% + of my assets are in tax deferred accounts, which are no-go for MLP (UBTI concern).

I would consider an MLP (and indeed own one) for a long term holding only, preferably something I never intend to sell. I think only EPD is really of high enough quality and even there are rumbling about converting to a c-Corp.

 

Are you forced to sell & pay the taxes in a C corp conversion?

 

Why would they consider such a move?

 

 

Changes to the tax code and a broader base of potential investors (some investors can't invest in MLPs).

 

Thanks

Lance

[james22]

Bought a little VGELX today.

[thepupil]

Tempted to buy some MMP. I unwittingly made a spectacular stock pick when I suggested my parents buy this in 2010 or so. The pitch was “these MLP thing seem cool. , sell side says this one is high quality”. I sold it in 2013 at a sub 4% (maybe even sub 3% yield) and a huge gain and a huge tax bill. After going nowhere stock wise for 7 years but raising distro’s It’s almost at a 7% yield with 1.25x coverage , very low cost and long term debt.

 

No IDR’s, pretty much self funded through its history, some long term secular concerns (refined products pipeline), not at a discount to space or relatively cheap though.

 

I bought a dumb money starter position in XOM to start my “i kind of don’t want to have 0% energy” allocation, may buy similar dumb money starters in DMLP and BSM as my “ooo cool royalties down a lot but no idea how to value this” allocation

[Spekulatius]

I bought some PSX today. My rationale is that this is really a diversified midstream, basics chemical , marketing and refining company that is trading for a refining business multiple. The glut in NG and crude supplies is a headwind rather than a tailwind for them. Strong FCF supports a rising dividend and share buybacks. since the spinoff from COP, they reduced sharecount from ~630M shares to 445M shares now, so it is a cannibal as well.

 

They had a weak quarter and missed earnings due to more refinery turnarounds and weaker chemical business earnings. I think next quarter will be stronger at least for refining earnings.

[sbalsam]

I own some WMB, which I consider undervalued, despite the noise around bankruptcies impacting their G&P operations. I like EPD, but I don’t like dealing with MLP, unless I absolutely have to and I am willing to make a larger and long term commitment. For me PSX is the most interesting as their midstream and chemical business becomes a larger part of their cash stream, yet it still is largely valued as a refiner. it has the Buffet seal of approval (despite the fact that he exited) and their share buybacks truly identify it as a cannibal. In the CC, they mentioned that thy have ~900M annual EBITDA thwt could be dropped down into their MLP. Do this at 10x EBITDA while the stock trades at 7x and we are talking about serious value accreditation.

Why don't you like MLPs? Is it just the tax implications or are there other issues?

 

I prefer c-Corp over MLP mostly due to ease of dealing with them (no K-1). Energy and even midstream is cyclical and volatile, so one can benefit from buying and selling at the “right time “. MLP are a pain in the butt when dealing with partial sales, distribution recapture etc. Also, 60% + of my assets are in tax deferred accounts, which are no-go for MLP (UBTI concern).

I would consider an MLP (and indeed own one) for a long term holding only, preferably something I never intend to sell. I think only EPD is really of high enough quality and even there are rumbling about converting to a c-Corp.

 

I know you were focused on midstream and not the royalty sector but since you are talking MLPs, I wanted to point out that DMLP has structured its business so that it can be owned by a non-taxable account such as an IRA. DMLP is a partnership but its income is not considered UBTI (it is UBTI that causes a problem for non-taxable investors). It avoids UBTI because (i) it has no debt and (ii) it has structured its mineral interests as royalties so that it is not considered to be actively operating a business. DMLP commits to continue to avoid UBTI.

Steve

[james22]

Energy vs Tech could be the monster mean reversion of a lifetime

 

https://thereformedbroker.com/2020/02/05/energy-vs-tech-could-be-the-monster-mean-reversion-of-a-lifetime/

 

Energy Stocks Might Finally Have Hit Bottom. It’s Time for Investors to Get In.

 

https://www.barrons.com/articles/energy-stocks-might-finally-have-hit-bottom-51581114825

[JRM]

My gut is telling me the turning point will be when there are more bankruptcies, reorganizations, and re-consolidation in the E&P space.  I don't we're at the inflection point yet.  Maybe we are.

[lnofeisone]

My gut is telling me the turning point will be when there are more bankruptcies, reorganizations, and re-consolidation in the E&P space.  I don't we're at the inflection point yet.  Maybe we are.

 

I think the mean reversion argument based on charts is flawed. I agree that there will be few BKs in E&P but it will be localized to mostly small E&P. My position is that energy will start turning around in 2021 or so. My rationale is that many of the CAPEX programs are funded through 2020-2021 and debt markets are basically off limits/very expensive for anything energy. This will force major E&P, mid-stream, etc. to focus on internal funding. As this happens, stocks will rerate. KMI is an example of what the playbook will look like. The trick is to discern quality players (e.g., WMB, MPLX, etc. vs. SMLP) vs. those that are too constrained by debt. You do get paid decent (largely sustainable) dividends/distributions while waiting.

 

I'm a bit overweight (compared to the rest of my holdings) in energy and (very) slowly adding.

[Jurgis]

What do people think about GPOR 2023-2026 bonds? Trading at ~22% YTM ($65 on 2023s).

http://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C639579&symbol=GPOR4303427

 

Cashflows for GPOR don't seem to be horrible although they are spending most of CF to acquire additional properties. A big question is whether they are forced to acquire or are doing it opportunistically. Is the company really as distressed as bonds seem to imply?

 

Edit: it's pretty clear that the panic is due to natgas pricing falling to floor and expectations that it will be given away for free in foreseeable future. GPOR production is almost purely natgas, so there's that.

 

Any other ideas for energy sector bonds?

[Foreign Tuffett]

In Jan. 2015 the S&P Oil & Gas Exploration & Production ETF (XOP) was at ~$46. Now it's $15.10. That's a huge, huge loss over a ~5 year time frame. There may be some more pain ahead given that XOP still holds OAS, WLL, CRC, and CHK, all of which are probably headed for bankruptcy.

[Foreign Tuffett]

XOP actually peaked in early 2014 at a little over $80, so it has actually performed even worse than my previous post outlined. Incredible.

[mcliu]

Pretty crazy sector. Apparently production is still going up even as everyone's going bankrupt?!

[rb]

I just don't understand why midstream is getting hit so hard.

[KJP]

I just don't understand why midstream is getting hit so hard.

 

I've also been intrigued by this.  Enterprise Products and Magellan Midstream, for example, are approaching 8% current distribution yields (and higher DCF yields).  And, needless to say, spreads between midstream MLPs and Treasuries are getting quite wide.

 

What midstreams, in particular, most interest you now?

[kab60]

I think WMB looks most interesting. Transco is great, and they take advantage of public vs private discrepanies. Seems close to sell a chunk of gathering pipes for 5b or probably around/plus 10xebitda while they trade below and the total company due to transco should be worth more. They should sell 49 pct of all their gathering pipes, get leverage down to their target and buyback shares.

[james22]

Bought a little VGELX today.

 

Lucky I limped in (only because I was without the cash to take a larger position):

 

VGELX -7% since then, -17% since the beginning of this thread.

 

A little bothered that Howard Marks believes energy isn't a bargain (unlike healthcare, he believes it has an uncertain future), but still looking to take a larger position.

[RadMan24]

MLPs may be getting hit hard because there are a lot of concerns of Capex cuts, and demand drops (China for example shutdown, if US and travel shuts down oil demand falls). MLPs need oil and gas to flow. If it flows less, they get paid less. It's the worst case for MLPs.

 

That said, ever since Peter Lynch mentioned energy services and oil were interesting industries in Barron's a month ago or so, It's been looking even better of late. Oil has dropped like a rock, but if you buy the big names or ETFs, 2-3 years from now, the situation will work itself out. SLB is also working on the biggest shale formation in Saudi Arabia for gas, so the demand for energy services and technical know-how is key longer term.

 

If you buy the weaker names, you would need a stronger and quicker recovery. It's like the banks after the crisis, a double dip would have killed the small ones, but the big ones would have come out okay. But since there was no double dip, smaller banks did tremendously well (and big ones did well too).

 

 

[lnofeisone]

Bought a little VGELX today.

 

Lucky I limped in (only because I was without the cash to take a larger position):

 

VGELX -7% since then, -17% since the beginning of this thread.

 

A little bothered that Howard Marks believes energy isn't a bargain (unlike healthcare, he believes it has an uncertain future), but still looking to take a larger position.

 

The beatdown isn't pleasant but I'm continuing to (slowly and selectively) add. CAPEX cuts and restricted cash access will continue to forcing MLPs to focus on balance sheets. I'm watching the demand side and for now cautiously optimistic.

[rb]

The selloff in some of the midstream names has been relentless. Is the coronavirus really going to render pipelines obsolete?

[JRM]

Most of the pipelines have been in service for over 50 years, and I expect many to be in service for at least another 50.

[opihiman2]

This board seems to be a glutton for punishment when it comes to energy / oil investments.  I thought people here would have learned their lesson by now with Sanridge Energy.  Oil has and will be in a multi-year bear market.  Until the shale producers get completely wiped out, there's going to be a ton more pain.  I've talked to and read a lot of stories from oil/gas workers in the patch, and everyone is saying it's absolutely brutal out there.

 

Oil is heading to the 30's.  NG is being given away for free.  And they are still pumping the oil out of the ground like there is no tomorrow.  The industry has a dumb habit of drilling and producing at all costs.  It's like the snake that eats its own tail.

[SharperDingaan]

Most investors hold their investments for < 1 year. 

Trading, that is largely based on anticipated results, catalysts, etc. over the next 1-2 quarters at best. Hence o/g is terrible, getting worse, and how does anyone just not get this. And totally ignores the fact that an investor can SIMULTANEOUSLY have both a SEGMENTED short AND long term view, on the same sector, at the SAME time. HUh? :o

 

US shale is in truly sh1te shape. Production is rapidly declining as capital discipline is being imposed, drill target quality declines, and the water/gas cuts rise. Can't produce without producing gas, can't flare the gas, hence little choice but to dump it in the pipelines; driving gas prices to record lows that go lower every day. When gas proceeds no longer cover transportation costs, or pipelines reduce volumes due to reduced demand (corona virus), the wells shut in; and for many it will be permanent.

 

Then there's Alberta. Just as video was supposed to kill the radio star, oil prices were supposed to kill the oil sands mega-projects. The latest being the proposed Frontier mine, along with roughly 19 other proposals. However oil sands isn't dead, it's now stronger. Now, if you want to play in the space you have to do it via an expansion of an existing player, raising the market value of all existing mega-projects, reducing the financial risks of any existing party, and creating an oligopoly over the flow of any new oil sands production above existing levels. But unlike the US, that rising gas cut from Alberta's shale has a nearby market, as oil sands is a hungry beast.   

 

Same industry, same timeframe. Night and day difference.

But over the long term the Canadian pipelines eventually will get built; permanently improving both egress, and value for the product. US shale has nowhere to go but down.

 

SD