For this year I think there are profits to be made in the energy sector. Regardless of the fact that oil is off by about $25 or 33% since the recent high in October 2018 at about $76 per barrel.
Oil is off the low of about $42, and that low mark can certainly be retested more than once before we’re out of the woods, and back on track toward $80+ per barrel and even close to $100 into next year. But the places to profit in the energy sector will not be on the exploration or drilling companies.
The place to profit in oil and gas will be the midstream subsector. Midstream companies are responsible for the transportation and storage of oil and gas. It could be through pipelines, on rail, or however they transport and/or store it.
There are two big items that favor midstream companies, and will enable them to continue paying rich distributions of 8-10%. And like other sectors you have to avoid companies with weak share structures and management not believing in their own business, and avoid companies with boatloads of debt.
The first factor is that midstream companies rely on long term contracts to move and store the product, and the price they get for their service doesn’t depend on the price of the goods they move. Similar to bringing a container of mugs into the US from China, the boating company that transports your container doesn’t really care what the container holds or what you can sell its contents for at market, they just move it for you at a set price.
It’s the same with midstream companies. Where ever oil and gas prices move, be it up or down, it doesn’t really matter. And that is key because if oil stays in a low range or falls, and drilling companies lose money on every barrel, the midstream companies are going to earn money anyway as long as they keep the pipes and tanks full. And that’s pretty likely because the current capacity can’t meet the demand.
The second factor is that last year the Federal Energy Regulatory Commission, or FERC, made a very favorable ruling in favor of the midstreams, that they can ask for higher prices and they can renegotiate existing contracts to higher prices as well. Which means that all else being equal, we should see increasing distributions from these companies.
The other spot in the energy sector where the stars are aligning for mad profits is uranium. After the tragic Fukushima accident in Japan there was a plunge in the spot price of uranium because Japan turned off all of its reactors and went to other forms of energy for electrical generation. That eliminated 100% of their demand for uranium and left their supply stock piled. But in 2018 that changed as they began to slowly bring reactors back online. Japan is continuing that path this year, gradually reopening more of its nuclear reactors.
But more important than Japan are two other factors. Over 20% of the world mining capacity was lost last year with mine operations being shut down. That will positively continue to impact the spot price of uranium this year. But more importantly are America, China, and other nations will either say yes to permitting and building or actually bring new reactors into operation. Last year the state of Georgia permitted the construction of the first new reactor in America in decades, and the Chinese are slated to begin, continue, or complete over 400 reactors over the next several years. This bodes well for demand of uranium. The other choice is to allow the lights to go out, and I don’t think that will happen any time soon.
Let me know what you think or ask your questions in the comments below. Until next time remember that there is always a bull market somewhere in the world, and on the opposite side of every crisis, lies opportunity.