Extreme weather has changed our investing priorities

Minnesotans are no stranger to the harshness and intensity of a deep winter freeze. During parts of the year, when the sun is only visible for 10 hours a day, sub­zero temperatures can seem insurmountable. Pipes freeze over like lake surfaces. Vehicles labor through daily operation.

The entire world just seems to slow down and struggle through an ice­-glazed period in time. Despite the warm comforts of shelter, there is one fact that always remains; it is really, really cold outside. Businesses are not immune to this fact, and companies that are unable to shelter their operations are hit even harder.

Minnesotans have it rough, but North Dakota is one of the most frigid places in all of America during the depths of winter. It just so happens that North Dakota is also the predominant home of the Bakken shale, where weather conditions have been much less than desirable over the past couple months.

Several companies have alluded to the weaknesses of oil and natural gas exploration and production activity in the Williston basin. American Eagle Energy (AMZG)released a report in early January detailing the impact that weather conditions have had on their operations.

Similarly, U.S. Silica (SLCA)cautioned investors in their fourth quarter earnings guidance that weather interruptions impacted their operations and demand for product. It seems that the cat is out of the bag in regards to weather impacting hydrocarbon operations in the Bakken, and the worst is likely still yet to come in our view.

Based on our personal experiences, the weather patterns have prompted a change in our investment priorities. We are placing less of a focus on companies engaging in exploration and production–and more of a focus on companies that feel less of an impact from the extreme weather.

In particular, our holdings in companies with a very specific geographical area of focus in North Dakota operations were pared down. Companies like Kodiak Oil & Gas (KOG), Oasis Petroleum (OAS), and Whiting Petroleum (WLL) focus a majority of their operations in North Dakota, and thus are prime candidates to experience weakness during upcoming earnings reports.

On the flip side, portfolio managers are tracking the nationwide oil and natural gas infrastructure build-out. One particular company that provides solid upside potential is Chicago Bridge & Iron Works (CBI). In our opinion, CBI is a prime candidate because of the company’s unique focus in energy infrastructure. The company provides engineering and construction services to the oil and gas industry as well as proprietary consulting and technical services.

CBI participates in projects ranging from pipeline construction to storage tank fabrication and refiner facility maintenance. As of December 2013, the company had laid over 2 million linear feet of piping. The low cost natural gas environment and sustained demand for liquefied natural gas (LNG) has generated a necessity for CBI’s services.

As a market leader in energy infrastructure, CBI is heavily involved in the domestic infrastructure buildout process. While only 20% of 2012 revenue was earned in the U.S., 65% of the company’s backlog was attributable to U.S. operations. If management holds true to their objectives, CBI may be able to capitalize on North American LNG and Petrochemical opportunities in the future.

With a list of oil and natural gas pipelines growing at a regular pace, the concept of declining demand behind CBI’s business seems farfetched. As the story of expanding, improving, and establishing a large scale pipeline infrastructure system continues to unfold, CBI should find themselves in the thick of it all as the build out continues to progress.

DISCLAIMER: The investments discussed are held in client accounts as of January 31, 2013. 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.

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