A declining oil supply should finally put a bottom on falling oil prices. This four-star-rated fund consists of primarily large-cap stocks, and its five largest holdings are: Exxon Mobil Corporation (XOM, 11.47% of assets), Chevron Corporation (CVX, 7.31%), EQT Corporation (EQT, 4.46%), Magellan Midstream Partners L.P (MMP, 4.15%) and EOG Resources, Inc. (EOG, 4.15%)
ICON Energy Fund Class S (ICENX)
from Sound Advice
The energy industry has been decimated by the oil glut, caused primarily by over-production from the US fracking boom. However, as new drilling continues to decline, it is only a matter of time until the glut will disappear.
Under the pressure of brimming oil storage tanks, the price of oil has fallen below the cost to drill. Of course, this makes new drilling impractical. Moreover, low oil prices have a lingering impact on the industry.
According to a mid-September Wall Street Journal article, US oil-and-gas producers have written down the value of their drilling fields by more in 2015 than in any full year in history, even more than the previous record set in the 2008 melt-down. Impairment write-downs must be taken by a company when the value of assets falls below the value on its books. Valuations must be based on the prior 12 month average of oil and gas prices. At the end of the second quarter, those averages were $71.50 per barrel for oil and $3.40 per million British thermal units (Mbtu) for natural gas.
Although impairment write-downs are accounting entries, and not real money, they reduce the value of the assets that can be used as collateral for loans to finance drilling. With oil and gas prices continuing to slide, it is certain that there will be more impairment write-downs for the third quarter. That means drilling activity will continue to decline.
We also know that US production will continue falling off because of the nature of fracked oil wells. Production drops 70% during the first year from the typical fracked well. This requires a substantial amount of new wells to be added to maintain overall production levels. We know that is not happening because the domestic drilling rig count has plunged 50% since last October.
US Production has been tapering off since the peak in early June, down by 273 thousand barrels per day. As of the week ending 9/25/15 (the latest week reported) there were 457 million barrels of oil in US storage tanks, which is 68 million barrels more than before the glut. This is a significant improvement from the 101 million barrel glut that existed in April 2015, a reduction of 40 million barrels. Today’s 68 million glut is less than 9 days of our imported oil needs of 7.5 million barrels a day. Even every drop of the entire 458 million barrels in all US storage tanks equates to only 61 days of imported oil.
As production continues to decline and becomes more pronounced, draws from storage tanks are certain to be substantial. That means the oil glut will disappear, the price of oil will recover, and that is bound to translate into stellar profits from carefully chosen oil and gas stocks.
ICON Energy Fund Class S (ICENX) is a diversified way to participate in the recovery with a basket of substantial companies. In the past, this fund has achieved growth even during periods of declining energy prices.
ICON management looks for changes within the energy sectors to capture value, rather than simply depending on rising oil prices. For example, the profit margins expand on pipelines when the price of oil is low, because the cost and price of storage and transportation have little to do with the price of oil. This fund is a good way to capture today’s values and profit from the recovery and changing landscape on a diversified basis.
Gray Cardiff, Sound Advice, www.soundadvice-newsletter.com, 800-825-7007, October 1, 2015