The most recent boom and bust cycle in the tanker market provides useful insight into the deteriorating fundamentals in the offshore drilling market.
Consider the similarities between Frontline (NYSE: FRO), a formerly high-flying tanker owner, and SeaDrill (NYSE: SDRL), a leading offshore contract driller.
Both companies levered up aggressively and paid a generous dividend. Like Frontline at its peak, SeaDrill offers a double-digit dividend yield, has posted impressive gains over the past several years and remains a popular stock among income investors. Readers also frequently ask me about the name and its prospects.
Moreover, SeaDrill and Frontline both took advantage of surging demand to expand their fleets dramatically and reaped the rewards of a tight supply-demand balance.
Although we don’t expect the market for offshore rigs to collapse in the same manner as the tanker market, an influx of new drilling units has skewed the supply-demand balance in customers’ favor, putting the day-rates that these vessels earn under pressure.
Whereas SeaDrill’s stock has tumbled by 15.2 percent over the past year, SeaDrill Partners’ units have delivered a total return of 15.6 percent.
Surging production in the Permian Basin has exceeded the pace of pipeline development, depressing the price of West Texas Intermediate (WTI) and West Texas Sour (WTS) crude oils at the nearby hub in Midland, Texas.
Investors seeking exposure to potential upside in natural-gas prices often gravitate toward producers in the Marcellus Shale. We prefer undervalued turnaround stories in the utility space that continue to reduce their exposure to the wholesale electricity market.
Far too many investors and commentators mistook last winter's surge in natural-gas prices as the start of a durable rally. But unless last winter marked the onset of a new ice age, the underlying supply and demand trends that prevailed before the polar vortex were always going to win out.
The stakes are high for the masters of midstream, particularly in the Northeast where surging output of natural gas has overwhelmed local demand and existing takeaway capacity, depressing the prices at Pennsylvania’s Leidy Hub relative to the Henry Hub in Louisiana.
Rather than regarding Kinder Morgan Inc.’s consolidation of its associated limited partnerships as a referendum on the MLP structure or the end of an era, investors should regard this move as a fresh start for the midstream giant--an opportunity to reshape itself to meet the demands of the marketplace and competitive environment.
Enterprise Products Partners LP boasts one of the strongest balance sheets and growth prospects in the MLP universe. However, a frothy valuation means that investors should stand aside and wait for a pullback before adding to or establishing a position in the name.
Breitburn Energy Partners LP's recently proposed acquisition of QR Energy LP demonstrates that the search for scale is alive and well among upstream MLPs, as private-equity buyers ratchet up the competition for asset acquisitions.
Imagine a future where US coal-fired power plants continue to generate reliable baseload power, while CO2 collected during their operation fuels the shale oil boom.
Elliott and Roger on Aug. 28, 2014
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