An Excellent Year For Energy

by Robert Rapier, Investing Daily

A year ago, a barrel of oil was worth something in the low $30s and natural gas prices stood below $2/MMBtu. This was the lowest natural gas price in nearly two decades, and some energy analysts seemed to be vying to make the most outrageously low prediction on future oil prices.

It was obviously a dumb time to invest in energy, right? Wrong! It was exactly the right time to invest in energy companies. It seems to be a well-kept secret, but energy was the top-performing S&P 500 sector in 2016:

Now here we are a year later with oil trading above $50/bbl, and natural gas $1 higher than it was a year ago. Yet going into this week, the 5% year-to-date decline of the Energy Select Sector SPDR (XLE) made energy the worst S&P 500 sector since Jan. 1.

This is the sort of pullback that provides an opportunity. Natural gas inventories are 10% below the levels of a year ago, despite another mild winter. The outlook for oil is at least moderately bullish, with Saudi Arabia reportedly targeting $60/bbl for its crude. Historically, the Saudis usually get what they want in the oil market, and that is going to benefit some of our favorite oil producers.

Who are those? I am glad you asked. Again, a year ago this week we were advising investors to hang in there with EOG Resources (NYSE: EOG), one of our Growth Portfolio holdings in The Energy Strategist:

"EOG is probably the most efficiently-run shale oil company, but even it can't escape the wrath of $30/bbl oil. The good news is that it still has a strong balance sheet, with a net debt-to-total capitalization ratio of 31%. Expect the balance sheet to weaken this year, but keep in mind that EOG is in far better shape than most of its shale oil competitors. The company will survive until oil prices recover, and that will be the cure to its current ills." 

EOG's stock has climbed about 50% since then, and the company remains at the top of the heap among shale oil producers. It proved that again this week by beating analysts' earnings expectations and showing an increase in annual free cash flow (FCF) for the fifth straight year. Strong FCF in the face of $50 oil is the sign a well-managed company, and EOG remains a favorite here. In fact, only two other stocks in our portfolios have produced better returns than EOG since we initially recommended them.