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By Aaron Levitt
| October 11, 2016
If there is one word that could sum up energy stocks and crude oil prices during the third quarter, it would be “volatility.” After rebounding off the lows hit during the first half of the year, energy stocks were essentially flat over the past few months — with the benchmark Energy Select Sector SPDR (XLE) gaining around 2% during the quarter.
But there was plenty of volatility along the way and that volatility and uncertainty could spill over into the last quarter of the year.
That’s because OPEC has thrown energy stocks a bone. During their last meeting, the cartel has finally decided to curtail production. Or at least they have promised to. With OPEC’s next meeting not until mid-way through the quarter, things in the energy sector could still be quite dicey.
In the meantime, oil prices have crossed the $50 per barrel mark for the first time since June. Adding in events like the upcoming presidential election, the Federal Reserve FOMC meeting and other geopolitical brouhahas and it’s easy to understand how volatility will be the common theme for energy stocks in the fourth quarter.
Under that framework, here are seven energy stocks to watch in the final quarter of 2016.
Philadelphia 76ers via Flickr
When it comes to energy stocks to watch, Chesapeake Energy Corporation (CHK) has to be on the top of the list.
This past quarter, CHK continued on its transition plans to reduce its heavy debt load, remake its portfolio of assets and live to see another day. And it seemed at first, CHK was doing just that. The natural gas fracker, however, was hit by some pretty bad news at the end of the quarter.
First, its major backer — hedge-fund manager Carl Icahn — pretty much abandoned the stock. Uncle Icahn’s various funds sold CHK stock by the millions and his handpicked board-members decided to fly the coop. That can be viewed as troubling sign that CHK’s prospects are dim.
At the same time, Chesapeake recently received notice from the Department of Justice to provide documents related to an investigation into possible antitrust violations. Separately, the DOJ, U.S. Postal Service and various state regulators have subpoenaed CHK for info based on its royalty payment practices.
For investors, the key for the fourth quarter will be just how these events influence CHK under the guise of higher natural gas/oil prices. That makes Chesapeake an important energy stock to watch during the next few months.
kees torn via Wikipedia
The high costs of drilling in the deepest parts of the ocean have been a major hindrance for the energy stocks that own advanced rigs. SeaDrill Ltd. (SDRL) has been one of the worst hit of the deepwater drillers.
SDRL’s major issue has been the company’s massive debt. As of the end of last quarter, SeaDrill had a whopping $9.5 billion in long-term debt. The real problem is that the firm had plenty of that debt coming due rather quickly and with the market still hurting, SDRL seemed poised for bankruptcy.
But the beaten down deepwater driller may have gotten a temporary lifeline. Chairman and largest shareholder, John Fredriksen has been rumored to be preparing a lending package to SDRL for as much as $1.2 billion. That amount should be enough to cover its near-term debts as well as provide some working capital in the short run.
But mid-term, it still won’t have enough to cover its pending debt maturities next year. Which is why the fourth quarter is so critical for SDRL. It needs to see energy prices really move higher to stop the bleeding in deepwater drilling. In the end, SeaDrill stock may still be in trouble and we’ll know that during the next 90 days.
Shannonpatrick17 via Wikipedia
Energy stocks were driven by a hefty dose of M&A during the third quarter. And that will drive returns for TransCanada Corporation (TRP) during the next one.
The midstream player has finally moved beyond the Keystone XL debacle when it made a pretty big transformative deal. By snagging Columbia Pipeline Group, TRP gained valuable interstate natural gas pipelines — around 12,000 miles of them — that run from the Northeast and south towards the Gulf of Mexico. It also gave it access to Columbia’s MLP — Columbia Pipeline Partners LP (CPPL).
TRP has decided to buy out CPPL as well and merge its assets back into its now-larger self. The real win will come when TRP drops down these newly acquired assets into its own MLP — TC PipeLines, LP (TCP). TransCanada hasn’t been able to fully use TCP as the bulk of its assets are Canadian and ineligible for inclusion.
But now it can and it has a ton of midstream assets it can drop down and there isn’t a need for any big organic projects like the Keystone XL anytime soon to boost cash flows or dividends.
And all of this will start paying off in the fourth quarter as the deal for Columbia has just closed.
Jerrye & Roy Klotz, MD via Wikipedia
Some energy stocks just can’t seem to catch a break and Freeport-McMoRan Inc. (FCX) is one of those energy stocks. As we all know, FCX made some bad moves and decided to get into the oil business just as prices were peaking. That wouldn’t be so bad, if it wasn’t for the massive debt it took out to buy stakes in the gulf and other regions.
One grueling oil rout later and Freeport continues to dig out from under the mess. That digging included a recent asset sale to Anadarko Petroleum Corporation (APC). APC managed to pick up some really awesome assets for around $2 billion that FCX just couldn’t make work. That infusion of cash was designed to help pay down the debt.
However, FCX hit a slight snag. Thanks to legalese in its debt covenants, Freeport is prevented from selling “a substantial amount of its assets in one or more related transactions unless the debt is assumed by the buyer.” Its lenders balked and now Freeport is faced with some sort of merger transaction to combine its various business units into one group.
Which, of course, the lenders have balked against.
In the end, FCX's story continues to get more complicated and we’ll see just how complicated it is during the fourth quarter.
Remember that time when BP plc (BP) spilled all that oil into the ocean, it faced a crazy amount of legal fees and become one of the most hated energy stocks in the world? No, I’m not talking about 2010’s Deepwater Horizon spill. I’m talking about a few days ago.
BP recently announced that it was monitoring a spill in the North Sea after a technical problem caused a leak. The remote platform was forced to shut down. Initial reports show about 95 tons of oil or 700 barrels had spilled into the sea. Now this isn’t a Deepwater Horizon sort of situation yet, but it does potentially bring a lot of heat BP’s way. The energy producer is still pretty much public enemy No. 1 when it comes to energy stocks. Given its history and promise to be good, any unwarranted attention is a major issue.
And if the Clair platform does happen to turn into another nightmare … Gulp.
All of this is happening just as BP is now dealing with the effects of the Brexit and the implications of the United Kingdom leaving the European Union. It’s critical that BP has a good fourth quarter and that the spill is nothing more than just a trickle.
David Shankbone via Wikipedia
As one of the biggest energy stocks on the planet, it’s always worth watching Exxon Mobil Corporation (XOM). After all, as goes XOM, so goes the rest of the industry. But this quarter, the reason to watch Exxon is because of the something it doesn’t do that the rest of the industry does. Namely, write down the value of assets.
The major integrated energy stock is being investigated because of how it doesn’t use mark-to-market accounting for its oil and gas assets. New York Attorney General Eric Schneiderman has questions on why XOM hasn’t written down the value of its assets despite the recent plunge in oil prices. Meanwhile, the SEC has initiated its own investigations into Exxon on its accounting for both write-downs and how it accounts for climate change.
Exxon has stated that it is complying with the investigations but that it has limited its exposure to write-downs because it is extremely conservative when initially recording the value of a new field. It underestimates the “real” value when first recording it.
While the whole mess might just blow over, it’s still a major distraction and XOM shares have been hit hard.
Not all energy stocks focus on crude oil, some focus on the sun. In the case of SunPower Corporation (SPWR), it’s worth watching just as much as any oil stock during the fourth quarter.
Lately, the sun hasn’t been shining for SPWR. Last quarter, SunPower reported terrible guidance and a real stinker of an earnings report. As if that wasn’t enough, the firm has dealt with plunging solar panel prices. With prices per kilowatt falling as low as 40 cents, most solar panel manufacturers can’t really make ends meet. As a high-cost manufacturer, that is a problem for SunPower.
The real problem is its debt. SunPower has total debt of over $1.6 billion. With the lack of earnings and less-than-stellar cash flows, investors have gotten spooked.
However, SPWR is not the next SunEdison Inc. (SUNEQ). That’s because major integrated oil stock — Total SA (TOT) owns the vast bulk of the firm and has some very long term plans for the solar stock. If push comes to shove, TOT will lend them the money or buy out SunPower all-together. And some of these moves could come next quarter, if things don’t improve in the solar sector.
This article is from Aaron Levitt of InvestorPlace. As of this writing, he was long TRP and TCP stock.