Merrill Lynch Offers Energy Themes to Watch in 2014

Energy stocks have underperformed this year, but Merrill Lynch analysts are reasonably positive on the sector for 2014, pointing to some key themes:

With the price of gas likely to remain in a narrow range next year, the firm says investors should buy high quality, large resource based stocks such as COG and RRC.

The net asset value race is over, and the coming year is about execution, Merrill Lynch says, seeing PXD and WLL as winners here.

Following 2013's wave of activism, the firm sees gains in HES and OXY.

Favorable outlooks for E&P budgets could lift oilfield services stocks focused on North America, such as HAL and SLB.

The Merrill Lynch team sees crude production rising to the highest level since 1989, and pinpoints TSO and VLO as the refiners to benefit the most in 2014 because they're "crude advantaged" and have stock specific catalysts for next year.

Finally, the firm suggests Investors with significant gains in CVX may want to take those and buy XOM for 2014.

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Citigroup Picks Winners and Losers Among U.S. Refiners

It may not be the gospel but we should pay attention as Citigroup picks winners and losers among U.S. refiners. Here is Citigroup's take on oil refiners. The firm expects to see a bottoming of earnings in Q4 for most names, but companies overweight the Midcontinent and/or Midwest could experience a difficult earnings environment through Q1 2014.

The diverging earnings performance will result in positive price appreciation for some refiners - such as Valero (VLO) and Tesoro (TSO), which earn upgrades to Buy - but underperformance for others, such as on Alon USA (ALDW), CVR Refining (CVRR), Holly Frontier (HFC) and PBF Energy (PBF), which will remain pressured by narrowing price differences between WTI and Brent crude.

TSO will benefit next year from a tighter gasoline market in California, and VLO will benefit from wider heavy light differentials in H2 2014 as increased Canadian heavy crude flows to the U.S. Gulf coast, Citi says.

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Tuesdays earnings.... Valero Energy [VLO] and Exco Resources [XCO]

EXCO Resources (NYSE:XCO) today announced first quarter results for 2013. Adjusted net income, a non GAAP measure adjusting for gains from asset sales, non cash gains or losses from derivative financial instruments (derivatives), non cash ceiling test write downs and other items typically not included by securities analysts in published estimates, was $0.13 per diluted share for the first quarter 2013 compared to $0.03 per diluted share for the first quarter2012.

Adjusted earnings before interest, taxes, depreciation, depletion and amortization, gains on asset sales, ceiling test write downs and other non cash income and expense items (adjusted EBITDA, a non GAAP measure) for the first quarter 2013 were $96 million compared with $111 million in the first quarter 2012.

GAAP results were net income of $158 million, or $0.74 per diluted share, for the first quarter 2013 compared with a net loss of $282 million, or $1.32 per diluted share, for the first quarter 2012. The first quarter 2013 includes a $187 million gain from the contribution of 74.5% of our interests in certain conventional properties to our partnership with Harbinger Group Inc. (HGI). The first quarter 2012 net loss was primarily due to a $276 million non-cash ceiling test writedown of oil and natural gas properties......Read the entire Exco Resources earnings report.

Valero Energy Corp. (NYSE:VLO) today reported net income attributable to Valero stockholders of $654 million, or $1.18 per share, for the first quarter of 2013 compared to a net loss attributable to Valero stockholders of $432 million, or $0.78 per share, for the first quarter of 2012. Included in the first quarter 2012 results was a noncash asset impairment loss of $605 million after taxes, or $1.09 per share, predominately related to the Aruba refinery.

First quarter 2013 operating income was $1.1 billion versus an operating loss of $244 million in the first quarter of 2012. Excluding the noncash asset impairment loss noted above, first quarter 2012 operating income was $367 million. The resulting increase in operating income of approximately $700 million in 2013 was primarily due to higher refining throughput margins in each of Valero's operating regions, except the U.S. West Coast. The increase in refining throughput margins was mainly due to an increase in margins for diesel and jet fuel and wider discounts on crude oil and feedstocks......Read the entire Valero Energy earnings report.


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What is T. Boone Pickens Buying?

Crude oil may have sold off hard recently, but billionaire investor T. Boone Pickens still loves energy stocks. After all, he made his fortune by investing in energy, so he knows a thing or two about picking winners among the oil, natural gas and power producers. Recently, BP Capital released its holdings as of March 31, 2012 in a 13F filing. Let’s take a closer look at some of its most bullish bets.

Top 10 Holdings

Company	Ticker	Value ($000s)	Activity
BP PLC	BP	20,345	12%
ENCANA CORP	ECA	18,392	New
NATIONAL OILWELL VARCO INC	NOV	14,262	0%
DEVON ENERGY CORP NEW	DVN	13,513	36%
TRANSOCEAN LTD	RIG	13,068	47%
CHESAPEAKE ENERGY CORP	CHK	11,563	-12%
WEATHERFORD INTL LTD NEW	WFT	10,489	35%
SANDRIDGE ENERGY INC	SD	9,250	0%
DAWSON GEOPHYSICAL CO	DWSN	8,426	0%
SUNCOR ENERGY INC NEW	SU	7,063	0%

Encana Corp (ECA) is a new position in BP’s portfolio – the fund did not report owning any shares of Encana at the end of 2011 – but it is one of its largest holdings. During the first quarter of 2012, BP initiated a new position in the company worth $18 million. A few other hedge funds also have Encana in their 13F portfolios. At the end of last year, there were 19 hedge funds reported to own this stock. Steven Cohen’s SAC Capital Advisors had nearly $100 million invested in Encana at the end of last year. Martin Whitman and Ken Griffin are also bullish about this stock. See chart below.

Pickens likes Devon Energy Corp (DVN) as well. The stock is the fourth largest position in his latest 13F portfolio. Pickens boosted his stakes in Devon by 36% over the first quarter to $190 million. Devon is also quite popular amongst the other hedge funds we track. There were 32 hedge funds with positions in Devon at the end of last year. Devon has also shifted its focus from natural gas to oil and natural gas liquids. We think Devon is well positioned to benefit from the higher margins of liquids.  See chart below. 

Of course, just because BP Capital is natgas and alternative energy-heavy doesn’t mean that Boone Pickens’ fund is eschewing traditional oil firms. His fund picked up 188,000 shares of Valero Energy (VLO) last quarter, building up a $5 million stake in the country’s largest independent oil refiner. Valero has the capacity to process more than 2.8 million barrels of crude per day through its 14 refineries, in addition to a massive ethanol business and a 1,000-unit gas station business. See Chart below.

Pickens stuck to his strong suit in energy with new picks Encana (ECA), Calpine (CPN), Exelon (EXC), Valero (VLO), and NRG Energy (NRG). He also added to BP Plc (NYSE:BP), Devon Energy (NYSE: DVN), Transocean, and Weatherford International LTD. 

Other large positions in Pickens’ portfolio are BP Plc (BP), National Oilwell Varco Inc (NOV), and Transocean Ltd (RIG). Pickens did not increase or decrease his stakes in National Oilwell. He increased his BP position by 12% and his Transocean position by 47% over the first quarter. All of these stocks have attractive valuation levels, especially BP. It is currently trading at only 5.6x its 2013 earnings and has a dividend yield of 5.12%. 

BP is the most popular oil company among hedge funds, followed by Exxon Mobil. Value investor Seth Klarman had a $400+ million position in the stock at the end of the first quarter. Billionaires Ken Fisher and Ken Griffin are among the fund managers with large XOM positions. They both boosted their stakes in XOM during the first quarter. See chart below.

Posted courtesy of  Turn Key Oil.Com


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Zacks: Kinder Morgan-Valero Pipeline Pact

Leading petroleum product pipeline owner and operator Kinder Morgan Energy Partners L.P (KMP) has partnered with San Antonio based Valero Energy Corporation (VLO) to build a new 136 mile, 16 inch pipeline to transport gasoline, jet fuel and diesel. Known as Parkway Pipeline LLC, the proposed initiative is estimated to cost $220 million.

While both companies will own the pipeline system, Kinder Morgan will be the operator. Parkway Pipeline is expected to have an initial capacity of 110,000 barrels per day that can be eventually expanded to over 200,000 bpd.

The refined products would be shipped from refineries in Norco, Louisiana to the Collins, Mississippi hub, owned by a subsidiary of Kinder Morgan, Plantation Pipe Line Company. Kinder Morgan has a 51% stake in the petroleum transportation hub of which it is also the operator. Thereafter, the refined petroleum products will be distributed by the pipeline systems, including Plantation, to important markets in the southeastern United States from this hub.

The pipeline is expected to begin operations by mid 2013 after getting approvals from the concerned environmental and regulatory authorities. It is expected to be accretive for Kinder Morgan unitholders upon completion as the project has a long-term backing of a credit worthy shipper.

To curtail environmental impacts, Parkway Pipeline construction will follow prevailing utility rights of way wherever possible. The project is expected to boost fuel supply, and at the same time offer all shippers larger access to Gulf Coast refineries.

Kinder Morgan’s continuous effort to upgrade its portfolio is evident from its newest business segment, Trans Mountain Pipeline (now under Kinder Morgan Canada), an approximately 715 mile transport system overbooked by a wide margin for September. Trans Mountain has a pipeline capacity of approximately 300,000 barrels per day.

P{osted courtesy of Zacks on Seeking Alpha. Kinder Morgan holds a Zacks #3 Rank, which is equivalent to a Hold rating for a period of one to three months. For the long term, we maintain a Neutral rating on the stock.

Phil Flynn: NO MAS!

No Mas, refiners wave the white flag as the Energy Information Agency report that US refinery runs plunge 10% to 80.5 percent! That puts refinery runs below the five year average of 81.4 percent causing a steep drop in gasoline and drop in distillates setting off a firestorm of buying in the petroleum complex. Keep in mind that that this is a five year average that includes two major hurricane related shut downs. In other words refiners are running like they were hit by a hurricane and if you look at their margins for profit for doing business they kind of were. His was the the third lowest run rate of the last 10 years, excluding 2005 and 2002.

Refining profit margins have fallen 83% in the last nine weeks a drop that has refiners just shutting down. If you can’t make a profit making a product why bother. And what is more it is likely that if demand and margins do not pick up soon we could see further cuts in runs and also in supply. The cuts supported crude as the market thinks that refiners will focus on only the highest yielding crude oil not wasting effort on the lower yielding stuff.....read the entire article.

Some Things Never Change, Another Summer Of Rising Gas Prices

Just like every other summer, gas prices will likely be rising. Gas prices will likely be a thorn in the side of consumers who are starting to feel more optimistic about the U.S. economic recovery.