Jim Cramer Finds A Diamond In The (Rough) Oil Patch

Adam Feik - INO.com Contributor - Energies

What a week for oil and energy. Okay, I know... what a 6 months! Ugh!

In case you're living under a rock (or just need a succinct summary of the carnage of late), oil has dropped about 2% or more every day this week except Tuesday, and looks on track to do so again today (Friday, Dec. 12th). All told, WTI oil prices as of mid-day today have dropped below $58, representing a decline of more than 46% since the commodity’s June 20th closing high of $107.95. In that time, natural gas prices and energy stocks have both given up about 25%, based on the US Natural Gas ETF (NYSEArca:UNG) and the Energy Select Sector SPDR ETF (NYSEArca:XLE), respectively. The Market Vectors Oil Services ETF (NYSEMKT:OIH) meanwhile, is off about 38% since oil's slide began.

Interestingly, this week's big shellacking has seen both oil and the dollar move lower, with the DXY index losing a little more than 1%. Natural gas prices are actually moving higher, and UNG's chart looks to the naked eye like this week could mark the beginning of a bottoming formation.

One small group that's bucking the trend

Last week, I highlighted Enbridge Energy Partners (NYSE:EEP), the Houston-based US affiliate of Calgary-based Enbridge (NYSE:ENB). EEP, ENB, and some other pipeline stocks have been (knock on wood) somewhat bucking the devastation in oil and energy. Accordingly, EEP and ENB continue to be among the only energy investments sporting green Trade Triangles in my MarketClub portfolio.

As fate would have it, ENB made impressively good news the last couple weeks, making a big enough splash to get the CEO invited on for a guest appearance on – wait for it – Jim Cramer's Mad Money show on CNBC. Whatever your vibe about Cramer, you ought to take 8 minutes and watch CEO Al Monaco's performance (here).

Specifically, ENB's recent good news has been as follows:

  • ENB raised its dividend by 33% for the next quarter. In addition, management forecasted 14-16% annual dividend growth for the next 4 years.
  • ENB settled a class-action lawsuit related to a 2010 oil spill in Michigan.
  • ENB announced restructuring initiatives designed to streamline the company's financial efficiency by transferring certain assets to affiliates.

Finally, in addition to this week's impressive developments, Monaco and Cramer discuss ENB's recent achievement of becoming the first company (about a month ago) to begin delivering large-scale volumes of crude via pipeline from Western Canada to refineries in the Gulf Coast region.

ENB's "toll road"

Despite plunging oil prices, pipeline owners like ENB may be worth owning. ENB, founded in 1949, owns and operates the world's longest crude oil & natural gas liquids (NGL) pipeline system, serving Canadian oil sands and US shale sites. ENB's customers – the oil producers – are suffering right now; but most will continue producing, and therefore will continue paying ENB to use its more than 15,000 miles of pipeline. ENB's pipeline assets are essentially a "toll road" through which an average of 2.2 million barrels per day of crude oil flows.

In the Cramer interview, Monaco expresses concern about the pain being inflicted on ENB's customers these days. Even so, he points out, ENB would not be announcing 5 years' worth of dividend increases without having strong confidence in his company's earnings and cash flows – which are driven not by oil & gas prices, but simply by volume. In fact, Monaco sees volumes continuing to increase over time, saying that even if TransCanada's (TRP) Keystone pipeline ever receives US government approval, "we're going to need all the pipes (we can get) coming out of the basin" over the next 10-20 years.

Cramer's take, for whatever it's worth, is this: 'The dividend boost in the midst of all this shows you this is a toll road and not a company that relies on oil going back to $100."

Consider this, if the Economist and others are correct in predicting oil will languish around $60 per barrel for the next 5 years (a big "if," admittedly), what would producers do? Would they shut down entirely and stop using pipelines? No. The US economy will continue churning, the pipelines will be used, and companies like ENB will collect their tolls.

Pipeline industry falling in sympathy?

While it makes intuitive sense that ENB would be less affected than producers by falling oil prices, ENB and other pipeline stocks have been suffering in sympathy (I suppose) in recent days. As for ENB, after trading in the $45-$48 range from late September through December 3rd, ENB opened at $54.87 on Thursday, December 4th, in the initial euphoria about its dividend and restructuring. As of this writing, ENB has given back all those post-announcement gains and is now trading at about $47 again.

Other pipeline owners' stocks are taking punishment – deserved or not – since December 4th as well. While WTI crude has fallen about 13% in that time, here's what selected pipeline stocks have done since 12/4/2014 (through mid-day December 12, 2014):

Kinder Morgan (NYSE:KMI): -4.2%
Enbridge Energy Partners (NYSE:EEP): -7.1%
TransCanada (Toronto:TRP.TO): -7.5% (also trades under NYSE:TRP)
Enterprise Product Partners (NYSE:EPD): -12.1%
Enbridge (NYSE:ENB): -14.1%

Bigger picture, all the pipeline stocks mentioned in this article have held up reasonably well since oil's peak on June 20th. See for yourself (again, through mid-day December 12, 2014):

KMI: +11.5%
EEP: +8.7%
ENB: +0.4%
TRP.TO: +2.75% (on the Toronto Exchange)
EPD: -8.0%

Perhaps when the dust finally settles, this pipelines group will ultimately present a terrific opportunity to "buy low." Note, all these stocks – except ENB and EEP – are in confirmed downtrends, according to their red Trade Triangles for all three key timeframes (short, medium, and long-term). In my view, intermediate- and long-term investors would be wise to wait for green Trade Triangle confirmation before risking assets. Perhaps even ENB and EEP's green Trade Triangles could be in jeopardy, based on price action since 12/4. Like I wrote last week, patience is a virtue, especially when it comes to looking for energy investing opportunities in today's environment.

Thank you,

Adam Feik
INO.com Contributor - Energies

Disclosure: This contributor owns Enterprise Product Partners (EPD), but not any other stocks mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.

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