Evaluate Your Upstream Energy Holdings (Common and Preferreds)

July 6, 2015   11 pm

Way back – over a year ago we moved out of our investments in the MLP Upstream arena–and we know a lot of our readers followed us out– a move that contributed (by avoiding losses) to super gains last year.  We have cautioned about getting carried away trying to pick bottoms in the upstream companies (although we even tried a couple issues early in the year) and now today we see a very scary crude oil sell-off, likely portending further drops to come.

Late last year we predicted that the rig counts in the oil and gas fields would bottom around June or July—and we pretty much hit it right on the nose.  What we failed to see was the ongoing increases in oil and gas production–we had assumed that the typical sharp declines in shale wells would start to cut production by now–but no it continues to rise. The problem now is that we are quickly moving through the ‘driving season’ and in just a short 8 weeks usage will begin to decline somewhat.

If you have moved into upstream companies–common or preferreds you had better take stock of your holdings now. With todays 4% loss in crude prices we are again reminded that we could easily fall into the $40’s soon–the U.S. economy is not likely to help on the demand side–and with China looking sickly any falloff in demand will crush prices.

We will caution once again that before this is all over we will have bankruptcies of many of the upstream companies and having ‘hope’ will not save your portfolio–the time will come to move into the upstream companies, but it won’t be anytime soon.

Specifically we would be checking the hedges that the upstream companies have in place.  While most of them had reasonable hedges for 2015, bunches of them have only smaller hedges for 2016 and seeing some of these companies booking around 50% of their revenue from their hedges is downright scary. It is likely when these hedges run off the company is heading quickly to total suspension of common unit distributions–and shortly thereafter (or maybe simultaneously) preferred suspensions.  Our list of energy related preferred is here.