With oil prices suddenly rising despite record inventory levels it appears investors are suddenly heading back into the energy sector. The various oil stocks are showing significant gains over the last couple days but there is still the potential for trouble ahead. If record inventory levels lead to a lack of storage space the price of crude could dip sharply at any time. That dip would be brief but it is a possibility.
Also, individual oil companies are wrestling with their balance sheets and fighting negative cash flow. The answer is to sell assets or issue new shares since banks are not in a lending mood right now if you are not sitting on gold bars as collateral.
Another way to play the eventual rebound in crude prices is with the dividend ETFs. They have been beaten down so far that almost any ETF is a buy. However, some have no ability for growth because of their high debt loads. Rather than single out one individual MLP we will pick the yield leader today.
Because not everyone will want to buy and hold a MLP for several months, I am also recommending a software company poised for a breakout.
NEW BULLISH Plays
AMLP - Alerian MLP ETF - ETF Profile
The MLP sector has been trashed along with the producers even though they have almost no risk. A pipeline MLP is a toll collector. They get paid a fee for every barrel of oil or cubic foot of gas that travel through their pipelines.
The vast majority of the pipelines in the country are full. They are so full that producers are having to resort to truck and rail shipments to get their oil to market. The pipelines are not in any material danger of a sudden drop in petroleum products flowing through their pipelines. Many contracts are take or pay. Producers commit to ship a certain amount of product and they pay for that commitment.
I am recommending the Alerian MLP ETF. This is an ETF that owns an entire basket of MLP securities and they all pay dividends. The AMLP is currently yielding 11.4%. They have raised their dividend every quarter since Q1-2012. They are not likely to break that string and if they did I suspect it would only be by a small amount. The Q1 dividend they announced on Feb 10th was 29.9 cents, payable on February 18th.
There are analysts that believe the MLP model is at risk. They believe the cost of capital will rise with the Fed rate hikes and the crash in the oil market. That means existing MLPs will have to pay more for new assets. That does not affect existing MLPs that already have their assets in place. They do not have to grow in the current energy environment. They can be content to sit on their assets and continue to pay dividends on their existing pipelines.
I believe the risk at the current price level is minimal. The MLP panic has run its course with several cutting their dividends and causing the sharp drops in the ETFs. Now that oil prices are firming and expected to firm even more beginning in April when inventories begin to decline, the MLP ETF buyers will return. Just a year ago AMLP was trading over $20 and could be there again by this time next year.
There is no scenario where oil prices remain low long term. This is a normal boom/bust cycle and they will recover and will trade significantly higher in the years ahead.
This is a LONG-TERM position. Oil prices should rebound starting this summer and then rise sharply in 2017 and you need to be content to collect the 11.4% while we wait for those prices to move higher.
You do not have to hold long term. My initial target would be $14 and that would be a 40% return and we could see that by July.
Buy AMLP shares, currently $10.49. No stop loss.
Buy July $12 call, currently 50 cents. No stop loss.
HDP - Hortonworks Inc - Company Profile
Hortonworks is a software provider that focuses on development, distribution and support of the Hadoop open source project. Hortonworks Data Platform (HDP), an enterprise-grade data management platform that enables its customers to capture, store, process, and analyze increasing amounts of existing and new data types without the need to replace their existing data center infrastructure.
Whether or not you have heard about this platform is immaterial because it is the up and coming thing for big data users. Hortonworks and Hewlett Packard Labs announced a collaboration this week to enhance Apache Spark. Hewlett & Hortonworks
They also announced new streaming analytics capabilities utilizing Hortonworks DataFlow (HDF) powered by Apache Kafka, Storm and NiFi. I hope you know what that means because I do not. DataFlow HDF
I could go on with dozens of new features and functions but the point I am making is that Hortonworks is not dormant and they are a bleeding edge software provider for big data customers.
In the Q4 earnings release they reported subscription revenue growth of +146% and a doubling of customers to more than 800. HDP was founded by a group of ex Yahoo engineers. Revenue in the quarter nearly tripled to $37.4 million. They guided for full year 2016 to revenue of $188 million and gross billings of $261 million.
This is a small company but one that is likely to explode higher or be acquired. Since their earnings on Feb 11th the uptrend has been steady with almost no volatility. Shares are currently at resistance at $12. A move over $12.25 should trigger some short covering as investors project the next resistance at $16.
Earnings are May 12th.
With a HDP trade at $12.35
Buy HDP shares, initial stop loss $10.85.
I am not recommending an option because of wide spreads.
NEW BEARISH Plays
No New Bearish Plays