Energy Income Weekly: Falling Commodity Prices Pull Energy Equities Lower

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Energy Income Performance

The energy sector suffered a severe beating, with the XOP ending the week at 6.3%. This compares to the 0.3% drop for the S&P 500. E&Ps suffered the most with the XOP falling 7.2%. Midstream was better, however, closing the week down 1.2%.

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Crude oil and natural gas both had a difficult week. WTI fell 4.2% due to inventory buildups that took place in recent weeks around the globe. Despite being seasonally average at this time of the year, recent builds have exceeded historical norms.

The Russian supply loss that was expected in the wake EU sanctions has not materialized as Russia has found willing buyers in India and China for its crude oil and refined products. Inventory increases in China of industrial minerals have also scared oil traders.

This suggests that the economic benefits of the nation's opening may not be as strong as expected.

We remain unchanged in our medium-term outlook on crude oil. We anticipate that the first quarter inventory build will be used in the second quarter and then draw in the third or fourth quarters. WTI and Brent prices should be anticipating the third quarter draws. We expect them to rally in mid-to late second quarter. Oil prices will likely rise significantly due to the high rate of crude inventory draw we expect in second half from historically normal levels.

Investors in energy should not lose sight of the fact commercial crude inventories are now at historic normal levels. To get to this point, it was necessary to add 430 million barrels (equivalent to 1.2 Million barrels per day) to commercial crude inventories. This was in addition to global strategic petroleum reserves and China's demand losses through 2022.

We were encouraged this week by the fact that the physical market is still in backwardation, despite recent inventory increases and falling front-month price.

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The natural gas price drop continued throughout the week. With continued cold weather forecasts and a relentless increase in domestic production, natural gas isn't getting a break. Although the Freeport LNG's imminent rise should provide some support, it is unlikely that natural gas will be saved from an increasing oversupply.

The S&P 500's worst performing sector, after the losses of the previous week, is now the energy sector (after the week).

SP500

), which is 4.2% lower year-to-date than the 6.2 gain recorded by the S&P 500. We believe investors have a lot of long-term buying options because of the low performance. In our latest equity purchases, we continue to favor energy equities that are exposed to higher oil prices.

Energy Income Equity Performance

NGL Partners (

NGL

The company () performed the best in our coverage universe over the past week, rising 32.7%. The company shocked the market the week before by

Announcement

The fourth quarter saw $98.1 million in debt reduction, and the company also announced its intention to repay all 2023 senior notes by mid-2018. This week, the units responded to the announcement. On Wednesday, NGL

Announcement

It was increasing its commitment to its asset-based loan facility to $600,000,000 on a permanent basis. Even after their recent run they offer substantial upside if the company can further reduce leverage. There are still significant risks for equity owners, so we should stay away from these units.

All of the worst performers in our coverage universe were exposed to natural gas. Sitio Royalties (

STR

), Cheniere Energy Partners (

CQP

Tellurian (

TELL

All of the above traded more than 8 percent lower as a result of plunging gasoline prices and no company-specific news. The main reason for the 16.6% drop was likely to be Bank of America's Tuesday downgrade of TELL stock by Bank of America.

Earnings news: DT Midstream (

DTM

) Beat consensus fourth-quarter Adjusted EBITDA at $221 million

Report

$227 million. DTM also increased its full-year 2023 Adjusted EBITDA guidance. DTM shares suffered despite the increase in capex forecasts. DTM joins Devon Energy (!) and other energy companies.

DVN

() for revealing larger-than-expected capex budgets. DTM's management did not provide any details on the higher capex forecast. They only indicated that capex in previous years was low and that several organic projects had been delayed. This year is a catch up. We don't see any reason to sell off. DTM's cash flow prospects are unchanged and its 5.3% yield is safe.

Weekly HFI Research Energy Portfolio Recap

Although our portfolio beat its benchmark, the Alerian MLP Index by 0.8%, it still fell by 0.4%.

Calumet Specialty Products Partners

CLMT

With a 10.0% increase, ) was the top performer. It is the most important position in our portfolio and has a significant influence on performance. The news that PBF Energy (PBF Energy) gave CLMT a boost this week has given CLMT a boost.

PBF

)

Sold

A 50% stake in the St. Bernard Renewables project, currently being constructed to Eni SpA.

E

PBF bought the stake for $835million, which is more than the total cost of the facility at $650 million. We are looking forward to the comments of management on CLMT's Montana Renewables plant.

Plains All American (

PAA

The ) traded 2.3% lower. The only good news was that it traded 2.3% higher during the week.

Closed

Keyera purchased its 21% stake at Fort Saskatchewan Facility for $367 million. We expect the management to use the proceeds for paying down our debt.

The natural gas was the portfolio's loser. EnLink Midstream

ENLC

The worst performer was ) which fell 9.3% after it failed to meet consensus Adjusted EBITDA expectations. ENLC

reported

EBITDA adjusted to $337.2 Million versus $350 million expectations. Management claimed that severe weather caused most of the company's fourth quarter miss. This management stated reduced fourth-quarter EBITDA to $11 million. We believe that management expects a 5% increase in Adjusted EBITDA in 2023. This is reasonable considering the recent performance of its Permian, Louisiana, and Louisiana segments.

Energy Transfer (

ET

After the announcement, ) saw a 0.2% increase in sales

Reporting

ET reported Adjusted EBITDA of $3.44 billion, compared to the consensus of $3.28 trillion. Full-year 2023 EBITDA guidance for ET was $13.1 billion, which is a little less than the consensus of $13.2 million. ET had an outstanding 2022 year, and we applaud management's efforts to reduce leverage and return distribution to pre-pandemic levels.

Martin Midstream Partners (

MMLP

)

reported

Fourth-quarter earnings were positive, except for its butane blend business which experienced losses in the fourth quarter. The company is currently winding down this business. The earnings report was extensively covered on chat and in an article. We refer readers to the article for more details.

Cheniere Energy (

LNG

Due to falling LNG and natural gas prices, ) shares have been weakened. The units are now undervalued further thanks to the 4.7% drop this week. Black Stone Minerals (

BSM

Due to falling natural gas prices, a total of (4) units were reduced by 4.4%. The hedges that were made last year at higher natural gas prices partially protect its financial results.

News of the Week

Feb. 17.

Williams (

WMB

)

Executed agreements

Chevron (

CVX

() to support natural gas exploration in the Haynesville Basin, deepwater Gulf of Mexico. WMB will be providing gathering and processing services to CVX assets as part of the agreement. CVX also committed to long-term capacity for WMB's Louisiana Energy Gateway project. WMB's projects won't earn enough returns for shareholders in today's higher rate environment. WMB is rated a Hold by us. We would not recommend adding to the name if prices dropped significantly.

Capital Markets Activity

Feb. 14.

Enbridge is one of the Canadian midstream companies.

ENB

Pembina (

PBA

) has announced conversion results for certain series preferred shares. ENB has announced its conversion results

Series 19

And

Series D

Preferred Shares and PBA have announced the conversion results of their shares

Series 21

Preferreds.

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Editor's note: This article only covers one or more microcap stocks. These stocks can be dangerous.