As the prospect of a global glut of oil sends shares of once-booming U.S. energy companies lower, some fund managers see value in pipeline and refinery companies, whose fortunes are tied more to the volume of oil than to its price.
Energy stocks have plummeted in recent months along with the price of oil, with U.S. light sweet crude oil most recently hitting a three-year low of $75.84 a barrel. The S&P 500 energy index has dropped 13 percent from a June high, and is the only one of 10 S&P industry sectors in negative territory in 2014.
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Still, not every stock is performing poorly.
Companies tied more to the transportation and refining of oil, and less to output and exploration, have been solid hiding places of late. Refiner Tesoro Corp is the S&P's best performing energy stock in the last month, rising 17 percent, and it has gained 24 percent on the year.
"They're like toll roads," said ClearBridge Investments' Chris Eades, who oversees about $8 billion in energy strategies at the firm and whose top holdings include pipeline operators Williams Companies and Kinder Morgan. Williams is the best S&P energy sector stock of 2014, up 42 percent, while Kinder Morgan is up 7 percent.
The fact that quantity has become a selling point is a reflection of the boom in oil production in the United States. Largely as a result of hydraulic fracturing, or fracking, the country is expected to produce a record 1.1 million more barrels per day in 2014 than the year before, according to the U.S. Energy Information Administration.
All told, shale production in places such as Texas and North Dakota has allowed the country to import 8.7 million fewer barrels of oil per day than in 2006, according to a research report by Citi.
Margie Patel, lead portfolio manager of the $604 million Wells Fargo Advantage Diversified Capital Builder Fund , said her energy holdings are concentrated in refinery and pipeline companies tied to U.S. production.
One holding, Plains All America Pipeline LP, a $19.4 billion market cap master limited partnership that runs a network of pipelines in the Midwest, said Wednesday its volumes swelled 16 percent last quarter compared with the same time last year. The company estimated volumes should increase an additional 10 percent in its next fiscal year. Its shares fell 3.5 percent Thursday after its expenses rose more than analysts expected.
Concerns that U.S. production will decrease if oil prices continue to fall have sent the Alerian MLP index, which tracks master limited partnerships, down nearly 5 percent over the last month. But Patel said these companies often have fewer political or exploration risks than the global energy companies that some fund managers have been turning to as defensive plays.
"If I'm going to be in energy, I want to be positioned in companies that have a higher likelihood that they can grow their business" because they are concentrated in high-producing shale regions, she added.
Exxon Mobil, by comparison, has a high cash flow but has a greater difficulty in finding places to invest its cash, she said.
Not every fund manager is following suit. Jim Kee, president of San-Antonio based South Texas Money Management, which manages funds for pension plans, said his funds are largely moving out of oil-related companies because global growth is slowing at the same time that production hits all-time highs.
"Oil prices are finally catching up with the economics," he said.
Energy companies that remain attractive, he said, are those such as ConocoPhillips, whose recent declines have made their dividend yields more attractive. ConocoPhillips, for example, pays a dividend yield of 4.1 percent.
Other fund managers say they would like to move more money into pipelines or refiners, but are stymied either by rules that prevent some clients from investing in master limited partnerships, or by the rising market value of the companies.
Bill Costello, a co-portfolio manager of the Westwood Small Cap Value fund, said mergers and acquisitions have pushed the market caps of most refiners above his threshold.
Now, he is on the outside looking in.
"We do think that those guys are the winners in the near term," he said. (Editing by Bernadette Baum)