In my opinion, the Covestor Capital Ideas portfolio is a hedged investing play on expanding shale oil production in the U.S.
Unfortunately, the strategy is not working out well at this time, thanks to the slide in oil prices.
Oil Price Hit
I expected better performance from our American Airlines (AAL) position, currently 10% of the portfolio, if the price of oil fell.
However, the airline is also suffering from Latin American economic weakness and earnings estimates are being reduced more quickly than we had anticipated.
Our oil longs, 17% of the portfolio, are a mix of exploration and production plays and high yield midstream transportation investments.
One holding accounting for 3% of the portfolio is Emerald Oil (EOX), which has exposure to prime acreage in the Bakken formation. Although the fields it controls appear very prolific, the majority of its value consists of proven undeveloped acreage.
The tumble in oil prices reduces the present discounted value of that acreage exponentially. With very little debt, the company should be fine in my opinion as long as the West Texas Intermediate (WTI) benchmark remains above the $80 mark.
EV Energy Partners LP (EVEP), or 4% of the portfolio, is a high yield development play in several well-known, energy producing basins including the Permian and the Appalachian.
Currently the most promising upside potential for the partnership is its acreage in the Utica, part of the Appalachian basin. As the shale play develops there, I believe the future cash flows of the limited partnership will be solid and the stock price may advance.
Southcross Energy Partners LP (SXE), 3.5% of the portfolio, is a midstream play in south Texas. It is involved in the Eagle Ford field and has good exposure to the growing natural gas liquids (NGLs) coming from those fields.
We think its recent combination with Texstar Midstream is a positive as is the high level of insider buying by executives in August.
Greenbrier Companies (GBX), 6% of the portfolio, is one of the premier rail car companies in the country. As such, it is an indirect play on increasing domestic oil production.
Although the stock price has moved up sharply this year, I believe current and projected earnings growth may justify the price. Order backlogs are strong, according to the company.
In my opinion, demand for much of the future tank car production and government mandated retrofitting of tankers currently in service is strong. This is true even in the face of potential declining oil production.
The additional potential demand from railroads for grain cars should also help solidify the earnings outlook. I personally believe the current pullback in the stock is a buying opportunity.
DISCLAIMER: The investments discussed are held in client accounts as of September 31, 2014. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.