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Best Bets in Oil and Gold
05/13/2016 10:00 am EST
Elliott Gue has long been one of the advisory industry's leading experts on energy and resources. Here, the editor of Capitalist Times and Energy & Income Advisor provides a road map for energy and gold investors, highlighting some favorite stocks in each sector.
Steve Halpern: Joining us today is Elliot Gue, one of MoneyShow’s most popular speakers, and editor of Capitalist Times and Energy and Income Advisor. How are you doing today Elliot?
Elliott Gue: I’m doing great. Thanks for interviewing me today.
Steve Halpern: Now, a few months back with oil prices below $30, you forecast that we would see a rebound towards $50 before the year was out. That forecast panned out rather quickly. Has the move been too far, too fast or do you think continued higher prices are in the cards now?
Elliott Gue: I actually do think the move has been a little bit too far, too fast. The problem is that at around $45 to $50 a barrel a lot of US shale producers can actually make money.
I was looking at some of the conference calls from some big shale producers over the past few weeks, like Pioneer Natural (PXD), for example. Their acreage in the Permian Basin, in some cases, they are making a 40% internal rate of return even with oil prices around $50 a barrel.
What that means, is that I think what we are going to see, if oil prices remain where they are, we’re actually going to see some shale production come back on the table.
In other words, some of these producers actually put rigs back to work or complete wells that they may have drilled last year, but not actually put into production.
I think that extra supply actually stands a good chance of pushing down oil prices again. I also think that Saudi Arabia, for example, doesn’t really want to see that. They want to see continued declines in US shale output so that they can gain market. I think they are very nervous to see oil prices where they are today.
I think they are very nervous to see how far and how fast oil prices have rallied. I think the rally has gotten a little bit ahead of itself. The longer it stays up here, the more self-defeating it’s going to be, because you’re going to see that extra supply come online.
I actually do think we are in for a decline back into the $30s. That will probably be the final leg or the final sort of gasp, in this bare market. I think in the short-term, I’m a little worried about oil prices.
Steve Halpern: Now at this week’s MoneyShow in Las Vegas, you’re going to be providing an in-depth roadmap for energy investors. I was wondering if perhaps you could give our listeners a sneak peak in an energy investment that would point to as particularly bullish right now.
Elliott Gue: Yes, absolutely. I think there is going to be huge opportunity for energy over the next few years. The reason is regardless of whether oil prices go down a little bit, short term as I expect, back into the $30s or we sort of hold here and maybe rally a little bit more.
The big picture view, the sort of 30,000-foot view, is that we’re right at the bottom of the cycle. We had an energy down-cycle that started back in 2014, mainly due to excess supply of oil and natural gas, actually, on the World Market.
That’s now finally coming to a bottom because of the declines in production, we’ve seen in things like US shale.
There is going to be tremendous opportunities for companies that have low debt, that have low cost of production and a lot of their energy subsector, as we come out of this down turn and enter a new, more gradual, albeit, new bull market in energy prices and energy stocks.
A couple of areas that I’d look at include some high-quality Master Limited Partnerships. These are companies that are involved in owning things like pipelines to move oil, natural gas, refine products around the country. They were absolutely hammered last year.
I think, in many cases, unfairly. Their business is actually holding up pretty well in some cases. There are some junky MLPs out there. Investors kind of threw out the good with the bad.
I would look at high-quality names like, for example, Enterprise Products Partners (EPD). They are the largest MLP out there. A very well diversified base of assets targeting everything from oil to natural gas.
A solid yield on it. Just a little bit under the average for the Alerian MLP index. I would look to buy that, if you can, on any dips into the low $20s. I think that would be a good price to buy it.
On the other side of the equation, the upstream side of the equation. Look at the high-quality producers and look in particular at high-quality producers with assets in low-cost plays like the Permian Basin in Texas or parts of the Eagle Ford Shale of southern Texas.
One name I’ve liked for a long time to buy on dips is EOG Resources (EOG). Essentially very little or no net debt. They have quality acreage in the Bakken Shale, parts of the Permian basin, the Eagle Ford shale and the Marcellus Gas Shale play. I’d look to buy that on any dips into the $60s.
I think it’s run up a little bit too much near term. That’s a name I’d really look to accumulate on dips. I think we’re going to get plenty of those. It’s going to be kind of a jagged bottom in oil prices and energy stocks.
You should use that volatility to your advantage to buy these names on dips. I think two or three years from now, you’re going to be extremely happy with the upside you’ll see in those names.
Steve Halpern: In your latest issues of Capitalist Times, you issued a rather bullish outlook for gold. Can you expand on that?
Elliott Gue: Yes. Absolutely. I think the commodities complex as a whole -- everything from precious metals, to agricultural commodities to things like oil -- are kind of reaching a bottom now. They are not all going to bottom at the same time.
I think most of these markets are reaching sort of the lows of the cycle. Precious metals were among the first to pick up and I think reach a bottom. Gold, for example, hit its lows late last year, early this year and has really soared so far this year.
A couple of things are driving that. One is that the reason that gold prices were so weak in 2015 was concerns that interest rates in places like the US would rise this year.
It is becoming increasingly apparent to me and I think many others that the US Federal Reserve isn’t going to be able to hike rates much, if at all over the next year.
The US economy is growing at half a percent annualized, which is pretty pathetic from a historical perspective. Every time they hint at raising rates, such as last December, the stock market sells off and gets crushed. That’s a major headwind for gold last year, that’s been kind of removed.
The other thing is, I think precious metals are essentially a proxy for investor’s confidence in central banks.
I think what we are getting to, is the point where investors are losing confidence in the ability of central banks to continue to stimulate growth or stimulate stock markets basically, by cutting rates or through policies like negative interest rates.
That game is kind of coming to an end. We’re getting to the point where new unconventional policies are occasionally even backfiring, like negative interest rates in Japan.
I think gold is going to be the play there. That’s going to be the asset that people want to own and sort of a store of wealth in this world of kind of cooky, crazy monetary policy.
I think we are already seeing that. We are seeing the holdings in exchange-traded funds targeting things like gold and silver absolutely soar since the end of last year. I think you’re going to continue to see that trend over the next few years. I expect higher gold and silver prices as a result.
Steve Halpern: For investors interested in exposure to gold, is there a name or two you’d briefly mention.
Elliott Gue: Sure. I think one thing you could do is you could buy an exchange-traded fund, which targets gold, which is the SPDR Gold Trust (GLD).
That’s one we’ve been recommending for a while now. Basically that is going to move with gold prices. If gold prices go up, that’s directly leverage to that. As far as stocks, mining stocks, there are a couple different ways you could go.
A smaller name that I’ve just recently added to our recommended portfolios is called Tahoe Resources (TAHO). It’s kind of a mid-tier gold and silver producer.
They have a big silver mine, actually the third largest mine in the world, in Guatemala, which I think is quite attractive. Silver prices, I think actually have a little more upside near term than gold.
They also have some interesting gold mines in Peru and Canada that they’re going to be able to expand over the next few years.
That’s exactly what I want to see. A low-cost gold and silver producer that’s going to be able to actually expand production over the next few years to take advantage of the higher prices I foresee.
Steve Halpern: Again, our guest is Elliott Gue of Capitalist Times and Energy & Income Advisor. Thank you so much for your time today.
Elliott Gue: Thanks for having me.
By Elliott Gue, Editor of Capitalist Times and Energy & Income Advisor
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