2015 was rough for the energy sector and most of the people who were invested heavily in it.
On today's very special energy Industry Focus episode, Sean O'Reilly, Tyler Crowe, and Taylor Muckerman compare their fantasy energy draft portfolio results, review some of the most dramatic and unexpected news stories that played out this year -- from Kinder Morgan's (NYSE:KMI) soap opera to the U.S. export sanction shift -- examine just how accurate predictions from earlier this year turned out to be, and share what everyone's learned from investing in and following this troubled sector in 2015.
A full transcript follows the video.
This podcast was recorded on Dec. 21, 2015.
Sean O'Reilly: We're reflecting on 2015, on this energy edition of Industry Focus. Greetings, Fools! I am Sean O'Reilly, joining you here from Fool headquarters in Alexandria, Virginia. It is Thursday, Dec. 24, 2015, and joining me to help load up Santa's sleigh with energy stocks are Tyler Crowe and Taylor Muckerman.
Tyler Crowe: Hello, everybody. We are totally recording a podcast the day before Christmas, for everyone's enjoyment.
O'Reilly: Cough, cough.
Taylor Muckerman: Ho ho ho!
Crowe: God bless us, every one.
O'Reilly: If I was going to work on Christmas Eve, I would be glad it was with you guys.
Crowe: If we were working on Christmas Eve...
O'Reilly: Guess we'll just dive back in unless somebody wants to...
O'Reilly: OK. Segment one: A somber review of the energy fantasy draft. This one is a doozy, ladies and gentlemen.
Crowe: Dun dun dun dun! So, some context for people...
O'Reilly: When did we start this?
Crowe: We started week one of NFL.
Muckerman: It was the official draft.
Crowe: It was opening day of the NFL season, and we said, "Screw it. Let's do a fantasy draft of our favorite energy stocks and see how we turn out by the end of the year."
O'Reilly: So, in third place...
Muckerman: We're taping it early as opposed to the end of the NFL season, because fantasy football playoffs are starting now.
O'Reilly: Yes. These prices are as of Dec. 16, 2015. In third place is yours truly. I foolishly assumed it couldn't possibly get worse for oil prices when the stupid things started.
Crowe: "Oil can't go any lower."
Muckerman: Back the truck up on producers, didn't you, Sean?
O'Reilly: Go big or go home, Taylor!
Muckerman: Yeah, it was a short-term game, so you made a worthwhile bet.
Crowe: Let everybody know what your picks were and how they went. This is your shaming.
O'Reilly: This is not as bad as what the guys upstairs do with their...
Crowe: You have to publicly announce...
O'Reilly: Have you heard?!
Crowe: ...to everybody on our podcast, all five people who listen, what you did.
O'Reilly: I'll start with the worst, so I can make myself look smarter at the end. Linn Energy at $3.50. It's $1.37, so that's down 60%. Oops. I swear, the hedges will save me. Second is Continental Resources. I just had to go with Harold Hamm. That's actually not doing too badly, considering what oil prices have done since the start of...
Crowe: Keep telling yourself that.
Muckerman: And he's the lone survivor of the frackers book I mentioned on the last podcast.
O'Reilly: Are all those guys literally gone?
Muckerman: Out of the business.
Muckerman: EOG (NYSE:EOG) is, obviously, still doing very well. But most of them...
Crowe: Yeah, it profiles like half a dozen guys in the oil industry. Aubrey McClendon, gone. Tom Ward, gone. Charif Souki, gone.
Muckerman: Just recently.
Crowe: George Mitchell passed away.
Muckerman: Bless his soul. Pioneer.
O'Reilly: May he rest in peace.
Crowe: Only one left is Harold Hamm.
O'Reilly: I picked that at $29. It's at $26.
Muckerman: That's not too bad.
O'Reilly: And last but not least is EOG. I picked that at $78. It's at $76, so down 3%. On the whole, down 24%. In second place is everybody's favorite energy analyst covering Canada, in particular: Taylor Muckerman.
Muckerman: Had to just qualify with "covering Canada," huh? Couldn't have just left it at "everybody's favorite"?
O'Reilly: Am I wrong?
Muckerman: What did I pick again?
O'Reilly: You don't even know?
Muckerman: I do, but I want to hear your voice say it.
O'Reilly: Your best pick was Silver Wheaton. Up almost 13%, so kudos. Second place was Spectra Energy. Picked it at $28, it's at $24, so down 14%.
Muckerman: Thank you, Kinder Morgan, for crushing that performance.
O'Reilly: And Devon Energy was your worst pick, down 23%, from $40 to $30. Any regrets?
Muckerman: No, not really. I'd hold all three. For disclosure, we did not actually purchase these.
Crowe: No, these are hypothetical.
O'Reilly: The winner of the three of us...
Crowe: Victory is mine!
O'Reilly: Up a whopping 1.5%! Tyler Crowe!
O'Reilly: Don't spend those winnings all in one place!
Muckerman: We should have turned the volume down before that. Sorry, everybody.
O'Reilly: I'm sure Austin can fix that. I just really wanted to emphasize that awesome return -- 1.48%!
Crowe: We had a great, great year.
O'Reilly: Best performer was SolarCity (NASDAQ:SCTY), coming up from behind! How down were you on that? It was bad. It was Linn Energy bad.
Muckerman: What'd you sell it at?
Muckerman: It was down in mid- to low-20s, so 50%.
O'Reilly: That's Linn Energy bad.
Crowe: Had we recorded this a day earlier, I would have lost, but guess what? The federal government comes in and gives a tax incentive credit to SolarCity, so up 40% in one day.
O'Reilly: No one saw this coming, right?
Muckerman: No. I would have bought SolarCity if I had.
O'Reilly: I edited all the little SolarCity articles that go through Fool.com along with Tyler Crowe here, and it came out of nowhere.
Crowe: There was some lobbying on it, but no one thought anything was going to happen. And certainly, when I made that pick...
O'Reilly: Some sacks of money were exchanged, but nobody thought...
Crowe: When I made that pick, I had no promise of "They're going to extend the investment tax credit on it!" I just thought it was going to grow anyways or be decent. But you know what? If you have to drop back and do a Hail Mary, it works.
O'Reilly: It's still rising, too.
Muckerman: Might as well throw it to a growing industry.
O'Reilly: Good for you. The other two picks of yours were, of course, Helmerich & Payne... that's up 6% as of the 16th. And the worst performer is Enterprise Products Partners, but they've got a nice dividend yield, so...
Crowe: Yeah, we didn't even include dividend yield in here.
Muckerman: Yeah, that was all stock appreciation. Or depreciation.
O'Reilly: We're running this through the rest of the season, right?
Muckerman: We can.
Crowe: The playoffs from here on out.
O'Reilly: I swear I've got a lot of tax -oss selling, so maybe I'll get a pop on the first.
Crowe: I get the buy, you two have to fight it.
O'Reilly: That's fine.
O'Reilly: So, Tyler Crowe's winning right now, because he's far luckier than he is good.
Crowe: That's for certain.
O'Reilly: Moving on. I'm anxious to get your thoughts. This has been, and I don't think I'm understating this, a rough year for oil and energy stocks.
Muckerman: Yeah, we just proved that.
Crowe: Let's just...
O'Reilly: Call it what it is. Biggest surprises, biggest disappointments of the year? Who wants to go first?
Muckerman: I have a surprise, which is kind of a disappointment. I don't own it, so it's not very disappointing. But definitely a surprise. The Kinder Morgan soap opera of the last few months is one of my biggest surprises. The third-largest energy company in North America, supposedly a stalwart dividend payer, brightest CEO in the energy industry according to almost everyone.
O'Reilly: Darling of the former Enron empire, all that good stuff.
Muckerman: All that good stuff. And then, out of nowhere, they go ahead and acquire more of Natural Gas Company of America, get downgraded on their outlook by Moody's, market gets a little crazy.
Crowe: Starts selling off.
Muckerman: Because this company that they bought, they bought 50% of it, and it was a very debt-laden company.
O'Reilly: Do you think that was a smart move? Is the market wrong?
Muckerman: I don't know, I haven't looked into it enough to really understand whether it's a good move or not. But Moody's thought that they would've had to put a whole ton of money into this company to restructure it. Granted, the other 50% is owned by Brookfield Infrastructure Partners, which is a very well-performing company out of Canada that has a great reputation. So, two companies that have great track records, have a lot of faith in this company, but Moody's downgraded their outlook a little bit. A little bit [...] the debt levels.
So, what happened next, Kinder Morgan said they're trimming the growth of the dividend from 14% to 6%-10% next year. Then, all of a sudden, they're like, "Well, maybe we're not going to grow it at all."
O'Reilly: What the heck happened? What was the time span there?
Muckerman: Mid-October to mid-November, late November.
Crowe: Yeah, this is a two-month story toward the end of the year.
Muckerman: Then they're not going to grow it at all. Then they're going to cut it by 75%.
O'Reilly: What happened in that month?!
Muckerman: I think they just came to the realization that -- I think they might have known it, but then the rating agency came out and got ahead of them, and they were worried about losing their actual debt rating.
O'Reilly: Right. And then the stock went up after they cut it!
Muckerman: That was the big overhang. They had more short interest. They had a lot of selling of yield holders worrying about a dividend cut. So, once they made it, they were like, "OK, it's cut 75%, we know what the stock is about now, they're not going to take on any more debt, they're not going to issue equity, they're going to fund their growth internally, they're still Kinder Morgan. Let's take a little bite, because they're trading around book value."
At least, it was before it popped a little bit. And that's where we stand today. So, dividend down 75%, it was up to a 13% yield at one point, now it's around a 3% yield. Little bit more reasonable. Still lower than it historically was.
Crowe: Played out like a nice, beautiful Telemundo soap opera.
Muckerman: Yeah, totally. Two months, it was like a great series, except it happened every single day.
O'Reilly: "I wonder what's going to happen next!"
Muckerman: You've probably seen the end of this saga, because their outlook is stable again with Moody's. They basically were on the phone with Moody's for two months figuring out what the heck they needed to do to keep their investment-grade ratings, and then get their outlook from negative to stable, which they did the very next day after they cut their dividend.
O'Reilly: Wow. That's a good pick, yeah. Can you top him, Tyler?
Crowe: I know it sounds kind of weird, because we're talking about all of 2015 and I just happened to be picking something that happened this week. It was the extension of the investment tax credit on renewable energy.
O'Reilly: They didn't just go out a year or two. They went out to the end of the decade.
Muckerman: They went out forever!
O'Reilly: That's a Sandlot reference, for those who don't know.
Crowe: So, we got an extension of wind and solar on that 30% investment tax credit to at least 2019, and then it starts to taper off until 2021 to 10%. Obviously, you can watch stock prices, solar companies love what's happened with this over the past few years. But if you think about the growth trajectory that was already baked into the solar industry, how they were like, "We're going to have a little bit of a hiccup in 2017, because people are going to have to adjust to this new world without the tax credit."
And then, all of a sudden, "Hey, guys, it's back! You still get that 30% discount!" I believe there was an article written on Bloomberg today, and they were talking about how this could add, easily, another 20 gigawatts of production capacity in solar alone, and another 18-20 in wind. So, we're talking about actually moving more and more toward that realm, which is going to have a domino effect. Think about coal companies, all of those old coal plants that are getting pushed out.
Muckerman: I saw the other day there's a company in China that is announcing 100,000 layoffs. It's a coal company.
O'Reilly: That's huge.
Muckerman: When we talk about big layoffs, we talk about 7,000 to 10,000 people.
Crowe: Everyone loses their mind when Schlumberger cuts 10,000 people; 100,000 -- that's more than the workforce of an entire company like Schlumberger.
Muckerman: So, that's the state of affairs for the coal industry right now. Thank you, solar.
O'Reilly: Wow. Before we move on, I wanted to point our listeners to a newly redesigned focus.fool.com. There, you'll discover a special offer to join The Motley Fool's Stock Advisor newsletter for all Industry Focus listeners. All loyal IF listeners have access to a special discount on Stock Advisor that works out to $129 for a full two-year subscription. And, if you join today, as part of your new subscription, you can check out exclusive content from Tyler Crowe's and my recent trip to Houston, Texas, where we interviewed executives from National Oilwell Varco and DistributionNOW. That was a pretty good time, right, Tyler?
Crowe: Great time. We'll probably be talking about it for a week, because one of the great things about it was talking business. And normally, you see these guys, and they get their three-minute segment on CNBC and they have to make their pitch. We gave these guys a full 30 minutes, 40 minutes, and even an hour to talk about their business, and just really lay it out for investors on what they want to do.
O'Reilly: Cool. So, moving on. I'm anxious to get your opinions on how 2015 has shaped and/or changed your investing outlook.
Muckerman: I'll give you the baton on this one to lead.
Crowe: Oh, boy.
O'Reilly: You're bloody and you're bruised.
Crowe: I'm quite bloody and quite bruised. I certainly made my fair share of mistakes. And biggest and most important thing, I think, I had been leaning toward in 2015 but totally confirmed it here. If I ever again hear another energy industry executive say, "We will grow into our debt load..."
Crowe: I am going to run as fast as I possibly can. I think we got enamored with companies saying they could grow, they'll be able to grow into that debt, they'll take it on and expand, it's cheap.
O'Reilly: Can you give examples of people that actually said this?
Crowe: I'm trying to think of a couple examples... Whiting Petroleum, they bought Kodiak Oil & Gas in 2014.
O'Reilly: Then they literally begged the entire industry, "Please, somebody, buy us."
Crowe: Yep. Couldn't get a decent price.
O'Reilly: Didn't even get a bid, not even a crappy one!
Crowe: Just happened to get some cheap financing to get things through. And there's just so many companies that leveraged themselves to the nose to grow into the shale base and the shale play, and thinking it would be this completely transformative thing, like, "America can become energy independent!"
We're still part of the global marketplace, and as fast as we grow, there was only so much demand globally that can be accommodated. And some places are going to lose, and some places are going to gain, but we can't gain as much as we thought could be added to the market the way that we did. And to say that you can grow at those sorts of levels and take on debt and not finance yourself with conservative, smart capital allocation, using cash flows and things like that -- I know it seems reflective, saying it now, but it just shows how important basic, good business practices are.
Muckerman: One thing, he said "energy independence," and I think it's even funnier now that we're going to export oil, because they say that we might import more oil than we currently are, just because we're going to export it. Just a funny little anecdote about energy independence. We could be energy independent, but we never will, because we're always going to sell oil abroad.
O'Reilly: We're all connected by the circle of life.
Muckerman: That's exactly right. Kumbaya in the energy industry. So, my reflection is the importance of diversification in your portfolio.
O'Reilly: And buying Silver Wheaton.
Muckerman: And that. No, there are tremendous businesses in the energy industry, but you're still part of the energy industry. So, even though you're investing in good businesses, do not only stick to one industry. And I think this proves why. You can find the best business in an industry, but it can still suffer right along with it.
O'Reilly: Cool, thank you for your thoughts.
Crowe: Sean, you're an investor too.
Muckerman: It's pretty basic thoughts, but it's like, basic thoughts are put on a pedestal when...
Crowe: Sometimes you need to get hit over the head with a hammer really, really hard to remember to go back to the basics.
Muckerman: Especially when the market is performing very well.
O'Reilly: Well, I started my career at the Fool in September of 2013, and I started in consumer goods and tech, and then, eight months ago, I pivoted over to energy and industrials. Even before that, I had been asking because the carnage in the oil industry and that started last November...
Crowe: Hasn't gotten any better.
O'Reilly: No, it's gotten worse.
Crowe: Welcome to the energy industry, by the way, eight months of perpetual decline.
O'Reilly: It's just been like [claps] "Yay!" No, it can get way worse before it gets better.
Crowe: As evidenced by your energy draft picks.
O'Reilly: Hey now.
Crowe: "Oil's going up from here. It can't get any worse!"
O'Reilly: We can't all get bailed out by the U.S. Congress, Tyler.
Crowe: I would love to go back to the September thing, because I do believe those were the words you said. You were like, "We've got to be somewhere near the bottom here, guys, right?"
O'Reilly: I'll tell you what. Tune in to the next podcast, we'll be talking about cash costs and oil, hopefully.
O'Reilly: Yeah, I want to. Or not. If you force the issue, I won't.
Crowe: Total surprise.
O'Reilly: I'm the host. We're going to talk about what I want to talk about!
Muckerman: What are we talking about next, boss?
O'Reilly: Actually, that's it for our show, Taylor.
Muckerman: That is?
Muckerman: That was easy. All right.
O'Reilly: Tune in next time. Same bat time, same bat channel.
Muckerman: Same pre-taped show.
O'Reilly: From Taylor "The Great Bambino" Muckerman. Well, all right. If you're a loyal listener and you have questions or comments, we'd love to hear from you. Just email us at email@example.com. As always, people on this program may have an interest in the stocks they talk about. And The Motley Fool may have formal recommendations for or against those stocks, so don't buy or sell anything based solely on what you hear on this program. For Tyler Crowe and Taylor Muckerman, I'm Sean O'Reilly. Merry Christmas and Fool on!
Taylor Muckerman owns shares of SolarCity and Spectra Energy. Tyler Crowe owns shares of Enterprise Products Partners, Linn Energy, LLC, National Oilwell Varco, NOW, and SolarCity. The Motley Fool owns shares of and recommends Kinder Morgan, National Oilwell Varco, NOW, SolarCity, and Spectra Energy. The Motley Fool owns shares of Devon Energy, EOG Resources, and Silver Wheaton (USA). The Motley Fool recommends Brookfield Infrastructure Partners and Enterprise Products Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.