Category Archives: Energy Performance

Energy Equity Performance – 1st Quarter 2013

For our graphical review of energy equity performance in 1Q13, please click here: TDA Energy Performance Review

Sector_Sorter_1Q13

1Q13 was a very strong quarter for energy equities.  Refiners & Marketers continued their strong performance from 2012 and were once again the strongest performing energy sub-sector in 1Q2013.  Nevertheless, the sector has become increasingly volatile.  The WTI-Brent spread that has contributed to strong margins for domestic refiners has shown some recent weakness.  Also, the rising cost of renewable identification numbers (RINs) will add costs to some domestic refiners in the short-term.  While we believe that these costs will eventually be passed on to consumers, the burden of this mandate has caused a headwind for these companies.  Further, some refiners are starting to forecast the costs to comply with the Environmental Protection Agency’s (EPA) mandate to reduce the sulfur content in gasoline from 30 ppm currently to 10 ppm by 2017.  Although these costs are not expected to be significant, it is yet another headwind that has caught the attention of investors.  Despite these challenges, the refiners continue to be positioned as one of the long-term beneficiaries of the supply growth of U.S. domestic crude.  While we are vigilant of short-term issues, we remain focused on long-term fundamentals that continue to look positive for this group of companies.

A host of MLP sub-sectors also provided very strong performance in 1Q2013.  At least some of this performance appears attributable to these securities “catching-up” after a disappointing 2012.  Despite strong fundamentals for many of the MLP sub-sectors in 2012, a number of exogenous events such as the 2012 U.S. presidential elections and “fiscal cliff” negotiations stoked investor fears that MLP tax benefits could be lost.  As we have moved past these events, investors have been able to refocus on the strong fundamentals, yields, and distribution growth of several of the companies in these sub-sectors.

Similarly, after weak performance in 2012, investors also pushed E&P equity prices higher in 1Q13.  Although E&Ps did get some support from WTI crude prices (+5.9%), it was surging natural gas prices (+20.1%) that helped to get investors excited about returning to low-cost natural gas producers.  Marcellus weighted producers Cabot Oil & Gas (COG), Range Resources (RRC) and EQT Corp (EQT) all posted strong gains in 1Q13 as prices approached $4.00/MMBtu.  In addition to support from natural gas prices, the acquisition of Berry Petroleum (BRY) by MLP E&P LINN Energy (LINN) is a noteworthy development in the E&P sub-sector.  This acquisition marks the first time an E&P MLP has purchased an E&P C-corp.  The low relative valuations of traditional E&P C-corps versus their E&P MLP counterparts provides an opportunity for E&P MLPs to make accretive acquisitions of E&P C-corps.  A read-through of this scenario for other E&P C-corps with developed asset bases may help to close this valuation gap and provide a tailwind for E&P C-corps over the longer-term.  

Energy Equity Performance – February 2013

For our graphical review of energy equity performance in the month of February, please click here: TDA Energy Performance Review

Some of the strongest performance in February came from the same sub-sectors that led performance in 2012. Most North American Refiners & Marketers reported strong 4Q earnings and 2013 outlooks. Increasing domestic crude production volumes are expected to continue the pricing pressure on domestic crude prices. This allows North American Refiners & Marketers to capture strong margins by sourcing domestic crude volumes and selling products that are bench marked against higher, international crude prices. In addition, the shareholder friendly policies of raising dividends and share buybacks have continued to attract investors.

On a similar theme, Oil Transportation & Storage MLPs were also strong performers during the month as many of these names continue to benefit from North American production growth that has created a deep inventory of organic growth projects. Earnings in 4Q were mixed for this group.  Most large cap names reported in-line results, but several smaller cap names (Genesis (GEL), Tesoro Logistics (TLLP)) had strong operational results that lifted the sub-sector. In addition, the MLP space was featured prominently in a Barron’s cover article during the month.

Sector_Sorter_Feb13

On the other hand, most North American E&P sub-sectors posted a negative median gain for the month. Several Large and Mid E&P’s reported ceiling test write-downs of a significant portion of their natural gas reserves as low gas prices continue to punish natural gas weighted companies.

Unfortunately, for those E&P’s that do not have premier natural gas assets, the news only got worse as Encana (ECA) announced that it would raise its Haynesville rig count to 5 by the end of 2013. ECA had no rigs running in the Haynesville for most of 2012. The company believes that they can achieve a 30% rate of return with a flat $3.50/MMBtu gas price assuming well costs of $13-$14 Mil. and reserves of 18 Bcfe per well.

On a similar note, Cabot Oil & Gas recently announced a new well in the Marcellus. This well, completed with a 35 stage frac, had an impressive 24 hour test rate of 41.4 MMcf/day and a 30 day average rate of 20.2 MMcf/day. These two data points imply that natural gas supply will continue to be robust and it will be a challenging environment for gas weighted E&P companies with less than stellar quality assets.