Update: General Electric. Shares of General Electric (GE) rocketed higher today, April 10,climbing $2.84, or 11.02%, on news that the company would sell the real estate holdings of its GE Capital unit for $26.5 billion. The company’s board has authorized a new share buyback program of up to $50 billion. If, after this news, anyone still cares about the April 17 release of first quarter earnings, the company confirmed guidance for operating earnings of $1.10 to $1.20 a share for its industrial business.
It’s not like the sale of assets belonging to GE Capital was unexpected. The company has made it clear that it intends to sell assets in its GE Capital unit and to reduce the operation to a financing business that supports the company’s industrial units such as jet engines and railroad locomotives.
But the speed of the move was more aggressive than expected and so was the decision to launch such a huge share repurchase program, partially funded by the asset sale. Most of the moves to shrink GE Capital to data have been much smaller incremental sales, such as the sale of the company’s Australian and New Zealand consumer lending business. The deal announced today includes an agreement with Blackstone Group and Wells Fargo (WFC) that accounts for $23 billion in real estate assets. The remainder, General Electric said today, will come from ongoing talks with other potential buyers.
General Electric has been a member of my Dividend Income portfolio since February 2, 2012. Appreciation to the close on April 10 is 47.6%.
I think General Electric remains a stock to own in your portfolio. The reallocation of capital from the GE Capital unit to the company’s industrial business means a potential doubling of return on investment since the industrial units aren’t subject to the same reserve ratios as the financial business is. (Regulators decided that GE Capital was a systemically important financial company and that upped the capital the unit was required to keep in reserve.)
The question at this point is how to characterize General Electric going forward. I had put the stock in my dividend income portfolio on the strength of a yield above 3% that looked like it was headed higher. Now, the company might be better characterized as investment in share price appreciation and as such maybe I should move it from the dividend portfolio to Jubak’s Picks
I’m going to wait for the conference call after the April 17 earnings report to see what the company says about its dividend policy going forward before I make that decision. I’ll have a new target price after earnings as well.
On May 11 I posted that I would sell Ensco (ESV) out of my Dividend Portfolio on May 12. I’ve been slow in posting the actual sell, however, and the usual recap of my logic. My apologies. Here’s that sell post now. On May 11, the shares closed at $26.13. On May 12, the close and sell price for the shares was $26.79. Today, the shares closed at $25.26. I missed the local high with my May 12 sell by a day. The shares closed at $27.35 on May 13.
The logic of the sell was simple: The rally in the shares of land-based and deep water drillers that went along with the rally in oil prices had gotten ahead of itself. Before a slight retreat on May 11, Ensco had been up 16.6% in the month.
The fundamentals of the deepwater drilling companies look likely to continue to deteriorate into 2016 as oil producers negotiate aggressively to cut their costs and a big back log of new rigs ordered near the market peak is set to hit the water in 2015 and 2016 before the schedule gets much lighter in 2017.
I suggested taking profits here before those fundamentals reasserted themselves in investors thinking.
Ensco’s quarterly earnings report, released on April 30, filled in some of those fundamentals. Ensco shows that 20 rigs (6 floaters and 14 jackups), roughly 30% of the company’s fleet, will roll off contract in 2015. Even if all of those rigs find new work, they’ll find it at lower day rates. Producers are determined to reduce costs by squeezing suppliers so that they can make money at $70 a barrel or lower and don’t need a return to $100 a barrel oil to turn a profit. In addition, drillers face a huge bulge of new construction. Estimates for the sector show 19 new rigs under construction for delivery in 2015 and 14 in 2016 before dropping to 4 in 2017 and 1 in 2018. (These figures don’t include rigs under construction in China.) Some of these will undoubtedly be delayed or even canceled, but their existence will help push down prices. Ensco itself has 3 drill ships and 3 jackup rigs under construction.
Total spend by oil producers on floaters will fall to $34 billion in 2015, down 8% from 2014, according to Credit Suisse with the analyst projections looking for another 10% to 15% drop in 2016 to $30 billion. If that projection turns out of be accurate, then I think we’re looking at capital spending on rigs bottoming in 2016 and a more sustainable rally emerging later in 2015 when that projection gets some confirmation from the data. I’d look to rebuy Ensco on that schedule.
Update January 20: Income investors are intensely watching dividend changes in the energy sector.
Before the plunge in oil prices, energy stocks attracted lots of dividend money because the sector was one of the few places where you could get a 5% return.
Of course, now, plunging oil prices have put those dividends at risk. The damage has been clearest in the oil service sector where SeaDrill (SDRL) cut its dividend completely and where shares of companies such as Ensco (ESV) and Transocean (RIG), now yielding 9.9% and 18.8%, respectively, are trading as if their dividends are in danger. (More on SeaDrill and Ensco in the next few days; both stocks are members of my Dividend Income portfolio http://jubakam.com/portfolios/ )
Is the damage about to expand to take in energy master limited partnerships in pipelines and sand for fracking? So far the evidence says No. But that answer is by no means definitive. What we’ve been seeing over the last few weeks has been limited but significant increases in dividend payouts by the solid companies in this group.
So, for example, on January 15, fracking sand MLP Hi-Crush Partners (HCLP) announced that it would raise its payout by 8% to 67.5 cents a unit from 62.5 cents. (The record date is January 30 and the payment date is February 13.)
I don’t think this means Hi-Crush is out of danger—or that the shares are about to immediately recover to the $65 range of last September from the current $37 a share price on January 21. There is just the little issue of whether the slowdown in drilling activity in the U.S. oil and natural gas shale geologies will cause a bigger than expected drop in sand volumes and prices. We’ll have a better feel for that when Hi-Crush reports earnings and revenue on February 5.
What I really want to know as I prepare to collect another 6.95% payout from Hi-Crush is whether that “impairment” in the share price is temporary or permanent—and how temporary it might be. Hi-Crush is a member of my Dividend Income portfolio.
It’s been quite a ride for units of Hi-Crush Partners (HCLP.)
On fears that falling oil prices meant an end of the U.S. energy boom and to sales of the sand that Hi-Crush Partners sells for use as a proppant in fracking, the price of the unit fell to $40.68 on October 9 from the August 29 high of $69.15. That’s a huge 41% plunge.
Then, as it became clear that most U.S. producers of oil and natural gas from shale geologies would make money even if prices fell to $60 a barrel (the median break even seems to be somewhere about $57), Hi-Crush units rebounded to $51.23 as of the close on October 23. That’s still well below (26% below) the August high but a good 21% above the October 9 low.
Besides the recognition that $80 a barrel oil didn’t mean that everybody in the shale sector would stop drilling, the rebound in Hi-Crush units has been helped along by two pieces of news. On October 16, the master limited partnership announced that it would increase its third quarter distribution by 9% to 62.5 cents per unit. That followed the October 9 news that Halliburton (HAL), the biggest provider of services to the U.S. fracking industry, would increase the annual minimum volume of proppant sand that it would buy from Hi-Crush on a long-term contract that runs through 2018. Halliburton has a front row seat on what’s going on in the shale fields and if it feels that it’s a wise move to increase its long-term proppant purchases, then that’s a good sign that the bottom isn’t falling out of sector. In fact shortly after the news of the purchase agreement with Hi-Crush, Halliburton reported its own third quarter earnings and said that it didn’t see a significant near-term slowdown in demand for drilling services as a result of lower oil prices.
Working in Hi-Crush’s favor is the trend to increase production from each well (which cuts costs too) by pumping more proppant down each well in order to induce more fracturing in order to release more natural gas and oil. The average well in the Bakken geology of North Dakota uses 6 to 7 million pounds of sand but Wall Street analysts are reporting wells using 20 to 24 million pounds in the Bakken and in other formations. That led to additional demand for 1 million tons of sand in the second quarter. That additional demand is as much sand as Hi-Crush sold in all of 2012.
It is reasonable to expect that the most hard-pressed shale producers might cut drilling activity. I think that’s likely to be outweighed by continued increases in sand per well as producers try to reduce costs per barrel further in response to the drop in oil prices.
We’ll know exactly how these two trends balance out when Hi-Crush reports its third quarter results on November 4 before the market opens in New York.
I’m keeping Hi-Crush in my Dividend Income portfolio http://jubakam.com/portfolios/jubak-dividend-income/ for its 5% yield. I think it’s reasonable to expect continued volatility in the energy sector to slop over only Hi-Crush but I would expect a gradual recovery back to the August high near $70 over the next year.
With the shutdown/debt ceiling crisis behind us, the stock market is free to worry about a slowdown in U.S. economic growth and to hope for a delay in the Federal Reserve’s taper until sometime in 2014.
That’s pushing the U.S. market away from growth sensitive stocks and toward what James Mackintosh of the Financial Times today called “bond proxies.”
That means stocks with safe dividends that won’t be cut even if the economy stumbles.
Yesterday’s market leaders were telecom stocks (up 1.7%), utilities (up 1.6%), and consumer staples (up 0.8%) on a day when the Standard & Poor’s 500 stock index climbed just 0.67%
The worry here, of course, is that a U.S. economy that wasn’t growing fast enough for the Fed to begin to withdraw any of it stimulus even before the shutdown/debt ceiling crisis will show even slower growth in the fourth quarter because of that crisis. And that the damage will extend into 2014 because we’re scheduled to revisit the shutdown and debt ceiling battles in January and February of 2014.
The hope—for bonds themselves and “bond proxy” stocks–is that uncertainty about economic growth will keep the Fed from beginning to taper off its $85 billion a month in purchases of Treasuries and mortgage-backed assets until January or maybe even March or April. That kind of delay would continue the post crisis rally in Treasuries that has sent the yield on the 10-year Treasury to 2.59% today from slightly above 3% in early September. Falling yields make the payouts from “bond proxy” stocks more valuable. For example, eight of the 12 stocks in my dividend income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ are up today as of 2:15 p.m. New York time. Verizon (VZ), which isn’t part of that portfolio, is up 1.57% today. Read more