Portfolio Manager Call Recap: The State of U.S. Energy

On a recent conference call, Portfolio Managers Ryan Kelley of the Hennessy Gas Utility Fund and Ben Cook of the Hennessy BP Energy Fund and Hennessy BP Midstream Fund shared their insights on the impact of the current economy on supply and demand dynamics and commodity prices for the oil and natural gas industries.

June 2020
  • Ryan C. Kelley
    Ryan C. Kelley, CFA
    Chief Investment Officer and Portfolio Manager
  • Ben Cook
    Ben Cook, CFA
    Portfolio Manager

Top Takeways

Supply, Demand, and Prices

  • Quickly following the destruction in crude oil demand and collapse of the OPEC alliance, production has been curtailed, and as economies begin to reopen, we’re seeing the oversupply imbalance diminish somewhat, supporting an oil price move to the mid to high $30s range.
  • We anticipate the price of crude oil will remain in the high $30s for the remainder of 2020 and should be in the $40s in 2021. In this range, many U.S. energy companies will restore curtailed production and some will revive growth efforts.
  • In contrast to the collapse in demand for crude oil, U.S. natural gas demand in 2020 is estimated to decline by only 3-4%, and the long-term fundamental growth trajectory for natural gas remains largely unchanged.
  • The low oil price environment could be supportive of natural gas prices; as oil production decreases, the natural gas produced as a byproduct also declines, which reduces overall natural gas production volumes.
  • An improving natural gas pricing environment should benefit operators in the U.S. dry gas producing shale basins, such as Cabot Oil and Gas, and pipeline companies including Williams and Kinder Morgan, and LNG company Cheniere.

Earnings, Valuations, and Payouts

  • Over the past few years, the growth in earnings per share (EPS) of Utilities has been about 1.5× their long-term average. Since the highs earlier this year, 2020 EPS estimates for Utilities have been reduced by just 2%, compared to a drop of close to 30% for the S&P 500 Index.
  • Over the past decade Utilities have traded at a 5-10% premium to the overall market on a P/E basis, but they are currently trading at a 7% discount to the S&P 500 Index (using 2021 estimates), providing an attractive entry point for investors.
  • Midstream valuations are compelling, currently trading at a more than 20% discount to their 5-year average on an enterprise value to forward EBITDA basis.
  • The Gas Utility Fund’s companies have grown their dividends 4.8% per year for the past three years. Nearly all have released their dividend policies for the coming year and are projecting an average growth rate approaching 6% in 2020.
  • While 2020 aggregate cash payouts for midstream companies will likely be lower than in 2019, midstream companies are expected to grow distributions starting in 2021 over the next several years.
    • Only two companies in the Hennessy BP Midstream portfolio have reduced payouts, and we believe the remainder are well positioned to weather the current environment.

Investment Considerations

  • The combination of historically low valuations, improving fundamentals, and the prospect for rising cash payouts make now an opportune time to consider an investment in midstream energy companies, particularly given the recovery that appears to be unfolding.
  • With approximately 80% of the portfolio in natural gas and diversified utilities and 20% in pipelines and LNG exportation companies, the Hennessy Gas Utility Fund provides a more conservative way to gain exposure to energy.

You might also like

Get insights and news delivered to you.

Sign up for updates

Learn how Hennessy approaches investing.

Our Philosophy

Let's work together to get you on your way.

Start Investing
Contact Us
Hennessy Funds
7250 Redwood Boulevard, Suite 200
 Novato, CA 94945
Follow Us

The Funds' investment objectives, risks, charges, and expenses must be considered carefully before investing. The prospectus contains this and other important information about the investment company. Please read it carefully before investing. A hard copy of the prospectus can be requested by calling 1-800-966-4354.

Performance data quoted represents past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance of the Fund may be lower or higher than the performance quoted and can be found here. Neither forward earnings nor earnings growth is a measure of a fund’s future performance.

Mutual fund investing involves risk. Principal loss is possible. Small and medium-capitalization companies may have more limited liquidity and greater price volatility than large-capitalization companies. Investments in foreign securities may involve greater volatility and political, economic, and currency risk and differences in accounting methods. The Focus, Total Return, Balanced, Large Cap Financial, Small Cap Financial, and BP Midstream Funds are considered non-diversified funds. A non-diversified fund, which may concentrate its assets in fewer individual holdings than a diversified fund, is more exposed to individual stock volatility than a diversified fund. A fund that concentrates its investments within one country, one sector, or a small group of industries, such as Japan, Technology, Financials, or Energy, may be subject to a higher degree of risk. Investments in debt securities typically decrease in value when interest rates rise. The risk is greater for longer-term debt securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities. Mortgage- and asset-backed securities are subject to prepayment risk, which is the risk that the borrower will prepay some or all of the principal owed to the issuer. Funds that invest in pooled investment vehicles (including ETFs) may experience higher fees. The formula-based strategy employed by some Funds may cause those Funds to buy or sell securities at times when it may not be advantageous.

Master Limited Partnerships (MLPs) and MLP investments have unique characteristics. A Fund does not receive the same tax benefits as a direct investment in an MLP.

The prices of MLP units may fluctuate abruptly and trading volume may be low, making it difficult for a Fund to sell its units at a favorable price. MLP general partners have the power to take actions that adversely affect the interests of unit holders. Most MLPs do not pay U.S. federal income tax at the partnership level, but an adverse change in tax laws could result in MLPs being treated as corporations for federal income tax purposes, which could reduce or eliminate distributions paid by MLPs to the Fund. If the BP Energy Fund’s MLP investments exceed 25% of its assets, it may not qualify for treatment as a regulated investment company (“RIC”) under the Internal Revenue Code (“Code”), and the Fund would be taxed as an ordinary corporation, which could substantially reduce its net assets and its distributions to shareholders. The BP Midstream Fund is treated as a regular corporation, or “C” corporation, for U.S. federal income tax purposes, and therefore, is subject to U.S. federal income tax on its taxable income at the graduated rates applicable to corporations (currently a maximum rate of 21%) as well as state and local income taxes. The BP Midstream Fund will not benefit from current favorable federal income tax rates on long-term capital gains, and Fund income and losses will not be passed on to shareholders. The BP Midstream Fund accrues deferred income taxes for future tax liabilities associated with the portion of MLP distributions considered to be a tax-deferred return of capital and for any net operating gains as well as capital appreciation of its investments. This deferred tax liability is reflected in the daily NAV, and as a result, the Fund’s after-tax performance could differ significantly from the underlying assets even if the pre-tax performance is closely tracked.

Glossary of Terms contains definitions and additional information.

To view the top 10 holdings of a Fund, please click the Fund name: Cornerstone Growth, Focus, Cornerstone Mid Cap 30, Cornerstone Large Growth, Cornerstone Value, Total Return, Equity and Income, Balanced, BP Energy, BP Midstream, Gas Utility, Japan, Japan Small Cap, Large Cap Financial, Small Cap Financial, Technology. Fund holdings are subject to change and not recommendations to buy or sell any security.

Opinions expressed are subject to change at any time, are not guaranteed, and should not be considered investment advice.

To view the Morningstar ratings for the Japan Fund, please click here. (Media - TD Ameritrade) HJPNX received Overall Morningstar rating of 5 Stars based on risk-adjusted returns among 35 Japan Stock funds, as of 12/31/2020 .

To view the Morningstar ratings for the Focus Fund, please click here. (Media - CNBC-B. Macualey) HFCSX received Overall Morningstar rating of 2 Stars based on risk-adjusted returns among 564 Mid-Cap Growth funds, as of 12/31/2020.

(Media - Ticker - M. Takeda) 1 USD = 105.36 Yen as of 07/27/2020

To view the Morningstar ratings, please click here.

The Hennessy Funds are offered only to United States residents, and information on this web site is intended only for such persons. Nothing on this web site should be considered a solicitation to buy or an offer to sell shares of any Hennessy Fund in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction.

Quasar Distributors, LLC, Distributor.

Subscribe for Updates

*Required Fields