Portfolio Allocation to Energy

[David L.]

Hello Everyone,

I am new the the EPG community. I have a question on what you all think the appropriate allocation to energy stocks would be in an equity portfolio of $500k?

I have currently have about 12% allocated to energy most of which is invested in XLE. My intention is to reallocate from the XLE into a mix of Sweet 16 and High Yield ideas from Dan with a small amount invested (10% of my total energy allocation) in the Small Caps.

I appreciate everyone's ideas and comments on this subject!
David

[Fraser921]

100 % lol , ok at least 50 %. Some of these name are earning FCF 20 % or more.
This is the only segment in the S&P that's rising so why not 50 % or more
Nothing's changing, politicians are all f 'd up with green new deal that will fail miserably, imho

Scale into the names and buy when the market is getting slammed. No matter how good the fundamentals are , the energy names goes down with the rest of the market, so there is a market risk.

There are 3 areas to consider based on your tolerance to risk.

1. Growth
2 Income
3. Combination

There are 3 types of companies. Ones that focus on
1. Crude
2 Natural Gas
3 Both

I search for catalysts that could affect cash flow and thus valuations
1. Hedge's run off, some people want hedges as this business is cyclical and the names will get hammered if prices drop
2. tight supplies/ fundamentals
3. Market ignorance, size
4. Paradigm shifts
5. % Hedge position and anticipated ebitda or FCF free cash flow, Production Volumes, Debt, MGT
6. Some people want dividends and that's all they care about.

Some names I like.

NG is hot right now, crude has moderated down from 120 to 90

AR a gasser, earning 2.5 b in cash, ev about 10 b, 25 % return and hedges rolling off in 2022. Unhedged in 2023
If NG stays 8 or better , this name will continue to go up.

MNRL Mineral rights , pays a good dividend good management. Unhedged. They have no headaches. They get cash when other companies drill and produce on their land.

SBOW a good friend recommended this gasser completely ignored

Deep value LPI,ROCC,CPE

Good Payout PXD MRO
Good MGT MGY

Others DVN EOG

A sprinkle at Canadian energy

HMENF, IPOOF, SGY all 3 are small caps

I'm bullish, so i seek un hedged names and I favor growth over income. But that's me, it may not be right for you

[allen46]

I pretty much agree with Frasier. I am way over weight energy and am doing quite well. I tend to have more weight in the NG stocks and the higher dividend payers who are also relatively large companies. I like CRK, AR, CTRA and SBOW in natural gas. Dividend payers I really like are PXD, DVN, EOG and FANG for slow production growth with solid dividends. I also like MNRL. Smaller caps that I like are IPOOF, ESTE and HMENF. The main thing is to spread investment over at least 10 stocks. I actually have a position in over 20 or Dan's stocks.

[allen46]

A couple of other things. I think energy is by far the best stock investment going forward and the risk in my opinion is very low, especially if you invest in the high yielding companies. I have well over 50% in energy and am up over 30% this year (would be more if I had invested 100% in energy). I really believe I can be up 50% in the next 12 months. Two other companies that I have large position in are KRP and SJT. They both yield well over 10% and are based on NG which I believe has further upside - just read and listen to Dan on this. So depending on your risk tolerance. I'd invest in high yield companies for at least half of your investment - MNRL, SJT, KRP PXD, DVN, EOG CTRA, and FANG. The other I would invest in high growth NG companies AR, CRK, IPOOF, SBOW . Other relatively heavy weighted NG stocks you might consider are OVV and ESTE.

All of these companies trade well below a 10 PE with a cash flow per share of below 5. You can't find this anywhere else.

[Fraser921]

I like your picks Allen

[dan_s]

Great discussion!

My 2 cents worth:

EPG started in 2001 by Kevin Hopkins and I took it over 100% in 2006. In those 22 years I have NEVER seen companies the quality of our Sweet 16 trade at such low multiples of operating cash flow. All 16 are free cash flow positive and none of them have near-term debt problems. Many of them have aggressive stock repurchase programs underway, which significantly reduces risk.

Over the years I have made my largest gains in the small-caps that have lots of "running room". The largest gains were made on Canadian Juniors like HMENF and IPOOF. Size does matter in this very capital intense sector, so there is more risk with the smaller companies.

At my age (68) I am moving more of my own portfolio into the companies in our High Yield Income Portfolio. They are all rock-solid companies with dividend yield you won't find anywhere else without taking a lot more risk.

We will be publishing an updated report on Brigham Minerals (MNRL) tomorrow morning. It looks really good, raising dividends for 8 straight quarters.