ANGEL FINANCIAL’S High Yield Energy...

February 2015

A N G E L F I N A N C I A L’ S

High Yield Energy Report

February 2015 Issue

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I bet you thought it would never end…

As you know, the High Yield Energy Report portfolio is made up of companies involved in the oil business in some fashion.

And any energy investor worth his salt knows that the free fall for oil prices over the last six months looked like it was going all the way to the bottom.

I guess that’s any investor’s gut reaction after being spoiled with a five-year bull market.

Luckily, we began this service when the bear market looked its most grim, and our recommendations were made at what we think is pretty close to the bottom in terms of value.

Which means our investments have plenty of room to grow.

Between the start of 2015 and the time of writing for this issue, oil has seen a steep drop, a recovery, and some extra volatility along the way. Here’s a graphic that tells the story well…

Late last month, after we mailed our January issue, oil stopped falling and started moving up again... that is, until financial analysts hypnotized investors.

Many commentators have speculated on the reasons for the recent recovery for oil prices, which I’ll describe in a moment.

But before we go further, let me remind you that fluctuations in price and explanations of why and how this happens are often difficult to determine.

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The only thing more difficult is predicting what will happen next.

So in today’s issue, you’ll see some examples of both: predictions and explanations. And my comments on them will show why you shouldn’t put too much credence into the “soothsaying” in the financial press.

Instead, it would behoove you to look beyond musings and into data, history, and long-term trends to find profits.

Luckily for you, we’ve done the legwork.

First, the Sudden Rise

Let me start by saying it’s earnings season.

For some companies, this means stock bounces and boastful reports (Apple comes to mind).

For oil and gas companies, though, the financial reporting and 2015 guidance has been skittish so far. The profit margins have been tight, and balance sheets reflect this.

The bear market for crude is brutalizing some of the best track records amassed during the shale oil bonanza and $100 oil prices.

What’s more, when oil companies provide the annual earnings reports, they also give us a look at expectations for the coming year.

So far, guidance for 2015 has reflected the drop in prices, and most of the announcements by oil and gas firms ring to the same tune: job cuts, shrinking CAPEX, and rig suspensions.

Oil companies the world over have rid themselves of over 100,000 workers, while, according to Baker Hughes, the U.S. oil rig count continues to plummet.

During the last four months, over 560 rigs have been canceled, postponed, or suspended. This means no more production will come from these wells, nor will new wells be completed.

For shale drillers, the problem is especially daunting, as it is imperative for tight oil producers to maintain a high level of new rig completions in order to produce more oil and stay profitable.

The following chart shows why shale drillers rely on new wells to stay profitable...

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As you can see, the majority of oil produced by any given shale well is produced in the first few months. After that, drilling declines sharply.

When oil was over $100 per barrel, this was no problem, as companies were raking in profits with which they could finance more drilling.

But after a 50% drop and oil fluctuating between the high $40 and low $50 range, drillers have to be cautious.

And when drillers have to be cautious, that means investors do, too — even if we aren’t always investing directly into the success of drilling companies.

Now, while I may paint the CAPEX cuts by oil companies in a bearish light, do not misunderstand: This wave of news is likely the reason oil has seen the rebound it has in February.

In fact, oil technically entered a bull market in the beginning of the month, as prices per barrel rose by 20% before declining and swinging back and forth in the low $50s.

Many analysts, myself included, figure that the wave of CAPEX cut announcements are the reason the price of oil and shares of most fossil fuel companies have gone up.

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Of course, we could be wrong — it could be that supply has waned and demand has risen. But the data rejects this idea.

Although rigs are dropping and companies are shedding dead weight, many oil fields are still growing production. North Dakota is producing a record 1.2 million barrels per day as of December.

Not to mention that Saudi Arabia hasn’t cut production amid the lower price environment, which was the final straw that broke the bull market’s back in the first place.

So although I don’t like to do this, I think it’s fairly safe to assume that oil prices have risen because of news on these CAPEX cuts by oil companies big and small.

However, even if the slight rise in stock prices has given hope to investors, it’s vitally important for you to realize that this is a quick fix that could, and probably will, end in the near future.

Don’t get me wrong; I love it when my oil investments rise. But I’m no fool, and I know that the rise is based on expectations, not hard evidence.

I think we all know that expectations hardly ever materialize in reality, and as long-term, high-yield investors, we have to recognize this in our investments or risk losing a lot of money.

See, when the price goes up on announcements like this, investors leave a lot to chance.

Instead of basing investment decisions on historical data, financial stability, and potential growth, many are falling victim to hope.

They hope that the CAPEX cuts will lead to less production and thus less supply and a jump in prices somewhere down the line.

And I agree with this idea. But buying on that impulse right now is a mistake unless you’ve waded through the important financial evidence.

Especially if you consider what some other energy experts are saying, too: We could still see prices below $30 per barrel.

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Then, the Pundit Prediction Machine

Just as oil prices were recovering, some “bombshell” stories hit the financial press that gave investors pause.

These stories went viral, and some have suggested that they had an effect on prices, although we can never really know for sure.

Here’s the first one…

On February 9th, Ed Morse, the commodities head honcho at Citi, wrote a note to clients suggesting that the rise in oil prices was unfounded and that prices would eventually dive again.

Morse claims that the bottom would be around $20 per barrel and would happen at the end of the first quarter or the beginning of the second quarter.

The note also predicted that oil companies would slow growth to 800,000 barrels per day this year and 450,000 barrels per day in 2016 as they cut rig counts by more than 50%.

In tandem with all of the news about rig cuts, it makes sense that growth will eventually slow, which means that as it does, the price will go up.

By predicting a bottom in the next few months, Morse establishes that once production, by virtue of cost, starts to slow down dramatically, the bottom will turn into a valley as prices rise again.

This note from Citi essentially moved the market. Investors returned to the bearish mood of previous months and sold off stocks as fear that the bottom hadn’t hit yet took over.

Now, before I share the next important story, let me mention that just last year in April, the same Ed Morse from Citi made another prediction: He claimed that oil prices would “collapse” to $75 per barrel over the next three to five years.

His timing (and price, for that matter) was a bit off back then, so I would advise you to acknowledge his prediction with little more than a grain of salt.

The next pundit speculation that spread fear through oil investment circles came from Bloomberg

View columnist A. Gary Shilling.

Earlier this week, Shilling penned a piece called “Get Ready for $10 Oil,” where he claims that oil will likely head to $10 or $20 per barrel. While I aim to criticize the piece for its effect on the market, I’ll acknowledge that he makes some good points.

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Some of the key points for why oil will go lower, according to Shilling, are that slow economic growth is slowing down oil demand, while production will remain high.

This despite the regurgitated media narrative that oil companies are cutting spending.

He says that as OPEC loses its status as a cartel, factions will break off, pitting the big-time oil producers against the smaller players who need oil over $100 to finance expensive social programs and government budgets.

When discussing the U.S. rig count, he writes, “Sure the drilling rig count is falling, but it’s the inefficient rigs that are being idled, not the horizontal rigs that are the backbone of the fracking industry.”

Also worth mention is the Wood Mackenzie survey Shilling talks about. After surveying 2,222 oil fields, the firm found that just 1.6% of them would lose money with oil below $40 per barrel.

These are some great ideas. Unfortunately, even if Shilling believes them to be true — and indeed if they are true — making the leap to say that oil will fall to $20 or even $10 per barrel is still wild speculation.

Sure, it gets clicks when investors are searching oil stocks, fracking, and low prices, as we are wont to do, but to actually make financial decisions based on something like this (without evidence) could derail even the best portfolios.

And either way, our portfolio is positioned to offer steady, consistent, and lucrative returns, which won’t be destroyed by oil bottoming out in two months then slowly coming back to a normal price.

In fact, that’ll only help us make more money as we build a larger position while prices are low.

If you were looking for any more evidence that it may not be a good idea to trust Shilling’s advice without more diligence, consider an editorial he wrote in 2013, where he claimed that “the U.S. could be relatively free from foreign oil dependence by 2020.”

One minute, when oil prices are high and production is booming, he’s pounding his chest about U.S. energy independence, and yet just a few years later, when oil is down, he claims that demand will remain flat — or perhaps even decline.

I guess it pays to write what’s hot instead of what’s correct.

Anyway, enough about what everyone else is saying... let’s look at what’s important.

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Company Updates

We have no new recommendations, but, as I mentioned before, we’re always poring over stocks and financial reports. So once we find a company that’s worth your money, we’ll recommend it.

For now, let’s examine what we already have...

Cypress Energy Partners LP (NYSE: CELP)

Market Capitalization: $208.61 Million

Shares Outstanding: 11.83 Million

52-Week Range: $11.54 - $25.78

Dividend Yield: 9.9%

Cypress Energy Partners is a master limited partnership that offers saltwater disposal and environmental services to U.S. onshore oil and gas producers, as well as pipeline inspections and integrity services to pipeline, utility, and oil and gas companies.

Cypress Energy is our play on the forthcoming crackdown on railroad operators transporting crude by rail. After a 4,000% jump in railroad accidents during the oil boom, every single derailment has been garnering more media attention.

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Last week, there were two within a few days of each other: One train in West Virginia loaded with Bakken crude derailed, exploded, and contaminated a local source of drinking water, all while causing damage and the evacuation of 1,000 people. A couple of days earlier, another train, this time in Canada, leaked an undisclosed amount of oil after derailing and exploding.

The number of disasters are adding up, and many regulators are calling for stricter rules on railcars. These rules stand to be prohibitive for railroad investments and quite valuable for Cypress.

Cypress will capitalize when oil companies and traditional pipeline companies pay to have their new and existing equipment inspected and fixed if necessary. We’ll be keeping you up to date with this information as we know more.

Beyond train crashes, Cypress saw a fruitful month since our last issue, gaining almost 40% in that time. After our initial recommendation in November, Cypress is up 11.22% to date.

The company just announced its fourth quarter cash distribution would equal about $0.40 per share, which is the same dividend as was paid in the third quarter.

In terms of annual numbers, at current prices, last year’s full dividend equals about 9.9% per share right now... A much better return than most stocks you’ll find — and this one has been beaten down by the market quite a bit.

If the market picks back up before or after the new bottom Shilling claims we’ll see in the second quarter, Cypress will provide us even better returns this year.

We rate Cypress Energy a BUY under $24

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Crestwood Midstream Partners LP (NYSE: CMLP)

Market Capitalization: $2.67 Billion


52-Week Range: $13.73 - $24.25


Crestwood Midstream Partners is a midstream master limited partnership and is a part of the larger Crestwood family of companies, which also includes Crestwood Equity Partners and Crestwood Holdings, the general partner.

Crestwood Midstream owns and operates assets in various parts of the energy value chain in natural gas, natural gas liquids, and crude oil. For the most part, the company focuses on natural gas and natural gas liquids, but it still has a good presence in oil transportation and marketing.

We recommended this stock in last month’s issue, and since that time the company is down by about 7.18% but has yet to report fourth quarter financial statements (CMLP reports on the 24th of February).

The reason CMLP is down even though natural gas is faring better during the recent cold spell is

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because of a strategic partnership that looks to have gone sour.

Quicksilver Resources, a company for which Crestwood gathers and processes gas in the Marcellus, made public that it missed a debt payment and was given 30 days to fulfill its obligations or be forced to file for bankruptcy.

This is the main reason the stock is down right now, but this isn’t the worst news in the world.

If Quicksilver does go bankrupt, it doesn’t change the fact that there’s natural gas in the ground in the Marcellus. All that changes is who pays Crestwood Midstream whenever Quicksilver’s old assets are bought out.

That or Quicksilver makes its payment, keeps its nose clean, and honors its contracts with Crestwood, if possible.

Anyway, beyond that, CMLP announced its cash distribution for the fourth quarter at $0.41 per share, which raised its dividend to 10.9% based on current prices.

The company, in tandem with Williams Partners, announced the commission of a 50/50 joint venture on a natural gas facility in Wyoming. The facility is the Bucking Horse gas processing plant and is reported to have a capacity of 120 Mmcf per day.

We expect to see good things from Crestwood when it releases earnings figures next week. In the meantime, we have no fear because of the recent decline.

For these reasons, we rate Crestwood Midstream a BUY under $22.

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CVR Refining LP (NYSE: CVRR)



52-Week Range: $13.37 - $28.55


CVR Refining is a spin-off of CVR Energy, Inc. and is located in Sugar Land, Texas just outside of Houston. The company is a master limited partnership with a variable distribution. It focuses on oil logistics and refining.

On Thursday morning, CVR released its fourth quarter earnings report, and investors weren’t pleased with the results. The company stated it made net income of $358.7 million on sales of $8.82 billion for the year 2014, compared with $590 million in net income on fewer sales the previous year.

The company saw a fourth quarter net loss, which weighed on the annual earnings because of an accounting method that, on paper, shows CVR to have sold its first oil purchases for much less after they were processed.

In plain English, the company bought oil in the beginning of the quarter when the price was still relatively high, then, in December, after oil dropped below $60, CVR had to sell it at a loss.

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We suspect that, because oil dropped so far so fast, it was impossible to reconcile these numbers, and the fourth quarter pretty much ruined a decent year of earnings.

Jack Lipinski, the company’s CEO said: “Refining margins have significantly improved since mid-January, in addition, our refineries have operated well year to date.”

He also blamed the margin issues on a 16-day shutdown for maintenance and low oil prices. While we don’t know the numbers for January yet, we’ll have to take Lipinski at his word and see what the Q1 numbers hold to get a better look at the stock’s value with low oil.

Also remember that this same accounting technique will benefit the company once prices go back up and it is able to sell cheaper purchases for more money.

We rate CVR Refining a BUY under $28.

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LRR Energy LP (NYSE: LRE)



52-Week Range: $5.61 - $20.11


LRR Energy is a master limited partnership that acquires and exploits late-in-life natural gas- and oil-producing assets in order to extract more of the fossil fuels from them and generate stable, reliable cash flow.

As we mentioned last month, LRR was preparing its fourth quarter dividend payment, which would bring its annual yield to a whopping $1.99 per share (33%). Well, if you owned the stock before January 30th, you should’ve received a payment on the 13th of February.

If you’ve owned the stock since we recommended it back in November, you’ve probably also noticed the 6% or so gain in that time period. Not bad, considering it’s an oil driller and prices dropped 50%.

Of course, like I mentioned earlier in the issue, oil’s volatility will undoubtedly affect drilling stocks like LRR more because it has a proprietary role in harvesting the oil, whereas midstream companies are just middlemen.

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So as oil prices rise, we’re likely going to see bigger gains from this company as well as more reliable dividends. When we discussed the distribution last month, I told you that a dividend this size was likely unsustainable unless the share price of the company goes up.

We still haven’t heard any guidance on future distributions from LRR, but we could hear something on March 3rd when the company announces fourth quarter results.

We Rate LRR Energy a BUY under $18.

Natural Resource Partners LP (NYSE: NRP)



52-Week Range: $7.54 - $16.95


Natural Resource Partners is a master limited partnership engaged in owning and managing mineral reserve properties. It primarily owns coal and aggregate reserves throughout the United States but also has some oil and gas assets in North America.

Since our November recommendation, Natural Resource Partners has seen its share prices slide by

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about 21%. Most recently, the slide was the result of mixed quarterly and annual financial reports, which were released on February 12.

The company saw fourth quarter revenues of $137.3 million, which was 45% better than the previous year. This is great news; however, the problem investors had were operating costs.

Even though the company saw a big boost in revenue, its net income (what is distributed to limited partners like you and me) was just $8.5 million, compared to $46 million in the fourth quarter 2014.

Of course, management didn’t just start burning piles of cash, but they did purchase assets, including the VantaCore construction aggregates business and the property in the Sanish field.

Because these purchases were in the fourth quarter, the latest report comes off looking worse than it actually is. This is all a part of running a business: You have to spend money to make money.

Add to that general investor disdain for coal companies (which are still profitable), and you can see why Natural Resource Partners took a hit this year.

We’ll continue to wait patiently and collect the dividend from this stock until investors catch on to its value.

We rate NRP a BUY under $16.

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Northern Tier Energy LP (NYSE: NTI)



52-Week Range: $19.77 - $29.60

Dividend Yield: 9%

Northern Tier Energy is a downstream master limited partnership with refining, retail, and pipeline operations in the Upper Great Plains subset of the PADD II region of the United States.

Northern Tier is down slightly since our initial recommendation (about -2% right now). However, the company has bounced back from its low we discussed in the January issue, which can also be seen in the chart above.

The company declared a fourth quarter distribution of $0.49 per unit and paid these dividends on February 17th. Northern Tier also said it would release its fourth quarter and annual SEC filing on February 26th before trading opens.

After looking through the CVR Refining earnings report, we hope that Northern Tier has avoided any tricky accounting that could look bad on its report. While this could happen to it too, it’s important to remember that Northern Tier has a diversified business that includes more than refining.

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The company has a pipeline as well as retail gasoline franchises. This should help in the event of losses due to oil prices or maintenance on the company’s sole refinery.

While we patiently wait for the fourth quarter earnings release, there wasn’t too much news involving the company. One noteworthy item was that Dave Bonczek, the CFO, decided to resign and will be replaced by Karen Davis, the Executive Vice President. She will assume both roles.

Keep your eyes open for next week’s release.

We rate Northern Tier Energy a BUY under $30.

Looking Forward

As I mentioned last month, the financial data from the fourth quarter is important to understanding the management capabilities of the companies in our portfolio.

So far, we’ve seen our coal stock falter as it tries to invest money and one of our refiners take a hit because of the steep fall for oil prices after Thanksgiving.

Moving forward, remember to keep your mind focused on this financial data and away from the click bait of the mainstream financial press. The goal for those pundits is to earn clicks and prestige rather than make critical decisions based on the financial standings of companies.

Also notice that all of our stocks are MLPs. This could be changing in the very near future. The goal for the High Yield Energy Report is to eventually include ETFs, high yield stocks, and other long-term investments. If you’re waiting for this type of investment, sit tight; it’s coming.

In the meantime, enjoy the dividends and have a good month.

Until next time,

Keith Kohl

Managing Editor, High Yield Energy Report

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High Yield Energy Report Copyright © 2013, 111 Market Place, Suite 720, Baltimore, MD 21202. All rights reserved. No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the

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