XOP - Energy Income Weekly: A Surging WTI Fuels The Risk-On Trade

Summary

• Commodity-exposed energy names significantly outperformed during the week.
• Various names have either broken out or are on the verge of breaking out to 52-week highs.
• We see this week's trends continuing in 2023 given our bullish oil-price outlook.

Energy Income Performance

The energy sector shot higher during a risk-on week. The S&P 500 energy sector, captured in the Energy Select Sector SPDR ETF (XLE), matched the S&P 500’s (SP500) 2.7% gain. Commodity-exposed names were the biggest winners, as crude oil prices rose 8.3%. The E&P-focused SPDR S&P Oil & Gas Exploration & Production ETF (XOP) was up 5.7%, and midstream rose 3.9% as G&Ps significantly outperformed long-haul pipeline operators.

MLPs lagged after having snapped back from their December doldrums over the past two weeks. The Alerian MLP Index (AMLP) gained 2.6% for the week.

Our coverage universe was strong virtually across the board. The risk-on price action was evident in that the best performers were the lowest-quality operators with the most speculative equities.

NGL Energy Partners ( NGL ) was the biggest gainer, up 18.3%, after management guided to higher than anticipated Adjusted EBITDA in the previous week on January 3. NGL’s equity remains highly speculative, as we explained , but that fact didn’t stand in the way of its huge gains.

Ferrellgas Partners ( OTCPK:FGPR ) was the second-best performer in our coverage universe, with a 16.9% gain on no news. We updated our FGPR outlook on Tuesday here . Like NGL, FGPR equity outperformed in spite of its speculative risk/return profile.

Tellurian ( TELL ) rounded out the top three with a 12.3% gain, also on no news. TELL is another speculative equity that we recommend avoiding.

The fourth-best performer was Cheniere Energy ( LNG ). Cheniere bounced back by 9.5% after a string of ugly weeks that saw LNG prices plunge in response to warm weather in Europe. We view Cheniere’s selloff as a buying opportunity for long-term holders. The company’s volumes are largely contracted in the form of long-term sales agreements that lock in a margin. It can benefit from renewed strength in LNG prices that could arise if Chinese buying returns and European demand surges before next winter, while Cheniere's stock fails to price in its growth expected to come online in 2026.

Other outperformers were concentrated in royalty trusts and G&Ps, which were driven higher after five consecutive days of gains for WTI. Viper Energy Partners ( VNOM ) was up 9.5%, near its 52-week highs. VNOM is one of the best-managed royalty trusts, but its units trade in our range of intrinsic value, so they discount its high quality. Black Stone Minerals ( BSM ) was up 8.3% after falling hard in previous weeks in response to plunging natural gas prices. Its strength came even as natural gas prices fell 6.3% this week, but it remains significantly hedged and its units have 10.4% upside to reach our $18.50 price target. We rate BSM as a Buy.

Our portfolio remains heavily weighted toward G&Ps, so their strength this week was encouraging. Those that declined during the crude oil selloff in the second half of 2022 have either recovered nearly all their losses or have moved on to 52-week highs. We have a bullish long-term outlook for crude oil prices from current levels and, by extension, for gathering and processing infrastructure, so we expect well-positioned G&Ps to outperform long-haul pipeline operators in 2023 as they did this week in response to higher oil prices.

Only three equities in our coverage universe were negative this week. Martin Midstream Partners ( MMLP ) units are adrift on no news as the market awaits an update on the company’s refinancing efforts.

Delek Logistics Partners ( DKL ) announced the details of its 2023 capital program on January 4, which were consistent with market expectations. The units had inexplicably surged above $60 in August last year, far above our price target of $50. Their retreat down to $47 on little news reflects a reversion toward their intrinsic value.

Crestwood Equity Partners ( CEQP ) was the worst performer, down 5.2% for the week. CEQP pre-announced disappointing fourth-quarter results due to the impact of severe weather, which will reduce throughput volumes and well connect activity across its acreage. Management still expects year-over-year EBITDA growth in 2023. CEQP has been among the worst capital allocators in midstream, and we recommend that investors avoid the units despite their 9.8% distribution yield.

Weekly HFI Research Energy Income Portfolio Recap

Our portfolio has been strong out of the gate in 2023. It is up 9.2% year-to-date versus the Alerian MLP Index’s 5.3% gain and the Alerian Midstream Energy Index’s 5.2% gain.

Several of our holdings remain dramatically underpriced. Moreover, each has a catalyst that we expect to come into play in 2023 and push its equity price closer to our estimate of intrinsic value.

EnLink Midstream ( ENLC ) hit 52-week highs this week on no news. ENLC’s Permian G&P operation is becoming a larger part of its operation, making a greater contribution to companywide financial performance. ENLC’s stock price now reflects its Permian system’s growth prospects.

USD Partners ( USDP ) units gained 7.3% on no news. Management hinted at the prospect of contracting new DRUbit by Rail business in the company’s fourth-quarter earnings conference call on November 2. We look forward to its next update in February, where we hope to see evidence that management is executing for USDP unitholders.

Energy Transfer ( ET ) is on the verge of breaking out to 52-week highs after this week’s 4.3% gain. We expect ET to continue to hike the quarterly distribution until it reaches management’s target of $0.305. As it does, we expect the units to rise toward our $15.25 price target, which implies 22.3% upside from Friday’s closing price of $12.67. We rate ET units a Buy.

News of the Week

Jan. 9. TC Energy ( TRP ) and the Environmental Protection Agency announced an agreement that requires TC Energy to recover oil and oil-contaminated soil and to contain the further spread of oil from its most recent Keystone Pipeline spill. The company has been silent on the details of the spill, both in regard to the spill’s cause and its financial impact to TC Energy shareholders. The silence is concerning because the spill is at risk of being politicized to TC Energy’s detriment. On January 9, Senator Maria Cantwell wrote a letter to the PHMSA Deputy Administrator Tristan Brown that challenged the agency’s decision to grant TC Energy a permit that allows the pressure in parts of the Keystone Pipeline to exceed the maximum levels allowed in its existing permits. The company has yet to provide a public response, leaving shareholders in the dark about how it plans to deal with the spill’s wider fallout.

Jan. 10. ONEOK, Inc. ( OKE ) reported in an SEC filing that it entered into an agreement with its insurance providers to settle claims for physical damage and business interruption that occurred from the fire at its Medford, Oklahoma NGL fractionator in July 2022. The settlement calls for ONEOK’s insurers to pay it a total of $943 million within the next 45 days. ONEOK, Inc. intends to put the proceeds of the settlement toward building a new 125,000 bpd NGL fractionator in Mont Belvieu, Texas. The new fractionator will offset the EBITA lost from the Medford plant, and management believes the new location is more suitable for the company than the old location. Since the fire, ONEOK has used third parties to fractionate the NGLs it would have fractionated at its Medford plant. While this does involve higher costs until the new facility is built, the incident won’t have an impact on ONEOK, Inc.’s 2023 outlook for more than 10% year-over-year Adjusted EBITDA growth.

Capital Markets Activity

None.

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