In a few recent articles (for example here) I suggested that one day we would look back on this period as a terrific buying opportunity for energy related issues. At the same time, I still have yet to become comfortable “pulling the trigger”. Thank goodness for small favors.
Anyway, the overall sentiment still holds. Energy is dirt cheap as are shares of most energy related stocks/ETFs etc. Again, that doesn’t necessarily mean that now is the exact moment to “load up”. To say that there is a wee bit of uncertainty regarding the future would be about the greatest understatement one could presently make. Still, it is important to plan ahead and to be prepared when the time comes. So, what follows should be considered “food for thought” and not “an immediate call to action.”
A Few Things Energy
According to conventional wisdom, the future is “green”. I’ll be candid – I am all for green energy, as long as when I flip the switch the lights come on AND when I look at my energy bill I don’t faint. So, let’s start with a “green” play.
Turth be told, ticker TAN (Invesco Solar Energy ETF) has never been much of a performer. Still, its in the solar business which people keep telling me is “the future.” In reality the primary thing it has going for it is that it hasn’t completely cratered to the same degree as just about every other stock in the energy sector. As you can see in Figure 1, TAN actually bottomed out at $12.60 in 2012 and – despite a near 50% decline during the recent panic – is presently trading around $26 a share. Not necessarily a screaming buy signal, but a nice relative performance as we will see in a moment.
In a sure “Sign of the Times”, the Good News is that gasoline prices are at their lowest levels in year, while the Bad News is that we don’t have anywhere to drive to except the grocery store. Figure 2 displays the chart for ticker UGA – the United States Gasoline Fund, and ETF that tracks the price of gasoline.
While attempting to “pick a bottom” is a fool’s errand, the primary point is that it is not that hard to envision the price of this ETF being significantly higher at some point in the years ahead. Whether an investor has the fortitude to weather whatever the short-term uncertainty and the patience to see how the long-term plays out are the primary issues associated with contemplating this ticker at the moment.
Figure 2 – Ticker UGA (Courtesy AIQ TradingExpert)
Ticker XLE is a play on the broad (mostly fossil fuel related) energy sector. As you can see in Figure 3, XLE has plunged to price levels not since 2004. In addition, it presently yields roughly 8.8%. That being said, an investor has to realistically expect that dividend payments in the hard-hit energy sector will see some significant cuts as things play out in the months ahead.
With an oil price war in full swing, not to mention a sharp decline in demand for the foreseeable future due to the coronavirus pandemic, the fundamentals for this sector are unlikely to improve soon. Nevertheless, the reality is that – at least for the time being – the world runs on crude oil. As a result, the current price range may one day be looked back upon as a once-in-a-generation buying opportunity.
Figure 3 – XLE (Courtesy ProfitSource by HUBB)
OK, let’s throw in one obscure, totally speculative – yet fundamentally intriguing – thought for consideration. Ticker PAGP (Plains GP Holdings, L.P.). Here is what they do (straight from their website):
“Plains engages in the transportation, storage, terminalling, and marketing of crude oil and refined products, as well as in the storage of natural gas, and the processing, transportation, fractionation, storage, and marketing of natural gas liquids.
*17,965 miles of active crude oil and NGL pipelines and gathering systems (emphasis mine as these things will continue to function as long as crude and NG need to be moved – which they do)
*50 barges and 20 transport tugs
*109 million barrels of storage capacity
*1,600+ trucks and trailers
*9,100 rail cars”
The bottom line is that as long as crude oil and natural gas needs to be moved, PAGP has a niche in which to operate. For the record, at $6.35 a share the stock’s present dividend comes to a yield of 22.7%. Certainly, the prospect of a significant dividend cut is a Signiant risk associated with this stock. But for the moment anyway the price is near an all-time low and the dividend yield is attractive.
Figure 4 – Ticker PAGP (Courtesy ProfitSource by HUBB)
As allows, DO NOT look upon what I have written as “recommendations.” Particularly in the current environment. They are simply “food for thought.”
Given current fundamentals:
*An ongoing oil price war (making drilling and refining unprofitable for many companies)
*An economy on shutdown (which cripples demand)
*An existential struggle between “green” energy and “traditional” fossil fuel-based sources (which creates uncertainty about future expectations)
All combine to make the energy sector a giant question mark at the present time. But if the old adage that the time to buy is when there is “blood in the streets”, than investors might be well served in the long run to start thinking now about how much capital they might be willing to commit to energy, and what type of catalyst might prompt them to actually “take the plunge.”
Disclaimer: The information, opinions and ideas expressed herein are for informational and educational purposes only and are based on research conducted and presented solely by the author. The information presented does not represent the views of the author only and does not constitute a complete description of any investment service. In addition, nothing presented herein should be construed as investment advice, as an advertisement or offering of investment advisory services, or as an offer to sell or a solicitation to buy any security. The data presented herein were obtained from various third-party sources. While the data is believed to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Past performance is no guarantee of future results. There is risk of loss in all trading. Back tested performance does not represent actual performance and should not be interpreted as an indication of such performance. Also, back tested performance results have certain inherent limitations and differs from actual performance because it is achieved with the benefit of hindsight.