I am recommending PermRock Royalty Trust (PRT); the company announced a monthly dividend of 6.74 cen...
Energy: Five Predictions for 2016
01/08/2016 10:31 am EST
While he does expect the price environment to get worse before it gets better, Michael Berger, of Technical420.com, feels energy prices may come off of their lows during mid-2016. Here, he shares four names in the MLP space he thinks will outperform the market on a longer-term basis.
- The Energy sector will outperform the overall stock market during 2016. We expect to see the price of oil approach $50 a barrel by the end of 2016 and this will be the main driver of the sector's outperformance. While we do expect the price environment to get worse before it gets better, we expect to see energy prices come off of their lows during mid-2016.
- The price of oil will recover before the price of natural gas. We have become more bearish on our view of natural gas leading into 2016 due to there being too much supply for the market to absorb.
- Expect more cash distribution cuts as management focuses on strengthening its balance sheet. As the cost of capital continues to increase, it will become more difficult for companies to find profitable growth initiatives. Several companies cut their cash distributions during 2015 and we expect this trend to continue during 2016.
- Consolidation in the form of M&A will accelerate in the second half of 2016. The weak oil price environment has many energy companies trading at multi-year lows and we expect to see consolidation during 2016. The companies that have strong balance sheets and ample liquidity will acquire the companies who possess accretive assets, but are not strong enough to survive the weak price environment.
- The MLP model is not dead and we expect to see back-half loaded gains during 2016. We believe we could see: 1) a recovery in oil prices, 2) improved energy investor sentiment, 3) equity yield compression, 4) visibility into upstream production, and 5) the launch of high quality midstream projects.
Remain Constructive on Long-term Outlook
We continue to prefer MLPs with geographically diverse asset portfolios, stable/visible cash flow profiles, ample liquidity to capitalize on growth initiatives, low-risk organic growth projects, manageable capital needs, and experienced management teams.
Some of the partnerships that we expect to outperform the market on a longer-term basis are: Antero Midstream Partners LP (AM), Enterprise Products Partners LP (EPD), Energy Transfer Equity LP (ETE), and Tesoro Logistics (TLLP).
Michael Berger, Founder and President, Technical420.com
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