Trading Energy Stocks and MLPs After Oil Prices Fall Before Earnings

08/02/2016 9:15 am EST

Focus: ENERGY

Michael Berger

President & Founder, Technical420.com

Oil prices have fallen more than 20% as energy companies prepare to report earnings and Michael Berger, Associate Editor of MoneyShow.com, expects to see companies lower its quarterly estimates after this sell-off. Discover energy stocks that are well positioned for growth over the next 12 months. 

Oil prices continued to move lower yesterday after a survey showed that OPEC oil production was at record highs last month.

Prices broke below $40 a barrel for the first time since April and this move came amid the largest addition of domestic oil rigs in two years. 

The collapse in oil prices comes at a very inopportune time as the energy sector prepares to report second-quarter earnings. The lower prices may force management teams to guide lower as previous estimates were provided we higher oil prices were expected to persist in the back half of 2016. 

Prices Impacted by Domestic and International Trends

Oil prices should continue to weakness in the near-term as demand tends to decrease in the late summer months.

Prices will also continue to be affected by OPEC production, which increased to record highs during July. These record production levels were a result of higher production from Iraq as well as Nigeria, which was able to produce additional crude exports despite militant attacks on oil installations.

OPEC’s leading exporter Saudi Arabia continued to produce near record levels of oil as it met seasonally higher domestic demand and focused on maintaining market share instead of trimming supply to boost prices.

If near record production levels was not enough to support higher oil prices, we have continued to see an increase in the number of domestic oil rigs, according to data from Baker Hughes (BHI). During July, we added the most amount of rigs in a month since April 2014.

Expect More Weakness

Plunging oil prices have had a ripple effect across the energy sector and it has caused a number of energy companies to cut their dividends.  This has forced research analysts to lower their projections and caused investors to sell their investments. But if oil prices manage to rebound, stocks prices and analyst earnings projections will likely begin to trend higher as well. So how should investors position themselves during these turbulent times?

While commodity price volatility should continue to act as a headwind, we recommend incorporating well positioned energy companies into any well diversified portfolio. Investors should target companies that have stable cash flow, visible growth backlog, and enough liquidity to capitalize on growth initiatives.

We believe the following stocks will outperform the market on a longer-term basis: Antero Midstream Partners (AM), Tesoro Logistics (TLLP), Newfield Exploration (NFX), and Concho Resources (CXO).

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By Michael Berger, President of Technical420

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