Drowning in Oil – Energy independence is a big part of my bull thesis for U.S. Equity markets. While not achievable for some time we continue to march down that path. Several of the major news organizations including Bloomberg, Fox News and the Wall Street Journal ran stories yesterday pointing to record output of U.S. Crude in 2016.
Currently the U.S. is pumping about 8 million barrels a day and is expected to rise to over 9 million by 2016. The higher production levels are being driven by horizontal drilling and fracking in shale formations throughout the country.
Falling U.S. imports is of course bad news for Mid-East producers. (See Friday’s Article “OPEC – The Emperor Has No Clothes”)
The sudden treasure trove of oil is about to raise a huge debate within this country. Should the ban be lifted on U.S. crude exports? U.S. Energy Secretary Ernie Moniz recently said; “The restrictions on exports were born, as was the Department of Energy and the Strategic Petroleum reserve, on oil disruptions. There are lots of issues in the energy space that deserve some new analysis and examination in the context of what is now an energy world that is no longer like the 1970s.”
I’m not sure where I’m going to come out on this issue but I suspect I will be leaning toward free market solutions. A successful energy policy needs to coordinate all available sources.
OXY 1 Year Chart
Alpha Select portfolios are currently underweight Energy but we do own two positions. We own a full position in Occidental Petroleum (OXY) strictly as a restructuring play. While we bought it well off its highs recently, it is still modestly under water for us and yes the chart looks awful. We won’t give this one that much room. One of its first steps is to raise about $12 Billion from the sale of Middle East assets. Funds could be added to stock repurchase and deployed into more profitable fields here in the U.S.
HP 1 Year Chart
We also own North American Rig operator Helmerich & Payne (HP). Its Flex Rig design is particularly well-suited to drilling challenges in the U.S.
BA 1 Year Chart
Boeing (BA) More Good News – Last night after the close Boeing announced a $10 Billion share repurchase and a dividend hike of 50%. Estimates and targets will likely head higher at most sell side firms. This morning Merrill raised their numbers modestly as well as their target which now stands at $154. At 18X 2014 earnings, Boeing certainly isn’t cheap. Growth stories rarely are. For now the fundamentals are all heading in the right direction. In addition to earnings and dividends, free cash flow is also on the rise. While there are issues Boeing’s management needs to resolve like the ongoing dispute with its largest union (Read Yesterday’s “Boeing vs. Union”) it still looks like clear weather ahead for Boeing and its shareholders.
Full disclosure: Boeing is still currently the largest position in Alpha Select portfolios. We are getting close to the point where it is prudent to take some of it off the table. We attempt to keep position sizes reasonably close to each other.
The following stocks mentioned today are long in funds managed by David Nelson. BA OXY HP
– David Nelson, CFA
