In this issue:

The action’s in the Permian. The downfall of crude to the current $40 a barrel has left U.S. shale drillers with little to celebrate, as they dispense pink slips and nervously eye the dwindling cash and borrowing capacity. And while West Texas hasn’t been immune, it’s fared noticeably better than North Dakota’s Bakken or the Eagle Ford in South Texas for reasons of geology and geography.

This is where the first driller pick we’ve made this year is focusing its efforts and, unusually for a midcap producer these days, it’s not laboring under a mountain of debt and wondering whether it will survive.

We believe crude is much closer to a cyclical low than it is to next year’s likely highs, which could very well top $60 a barrel. Energen’s (NYSE: EGN) upside in that scenario dwarfs its near-term risk, and this seems like the right time to get on board. In addition to a robust balance sheet and encouraging drilling results, the company stacks up extremely well against peers on  valuation, as our survey shows.

The longer this downturn lasts the harder it becomes to put money to work in the energy sector. After all, investors have now had a year of conditioning that such behavior produces results less pleasant than an electric shock.

At the same time, the longer prices stay low the quicker the adjustments needed to return them to sustainable levels will come, and the more time for the cuts made earlier to translate into less supply. There are a host of reasons to believe that this will not be a protracted slump as in the 1980s.

The trick is to stay constructive and productive while swinging only at the fattest pitches, which is pretty much the challenge for the drillers too. No one said this would be easy.   

Portfolio Update

• Energen (NYSE: EGN) added to Aggressive Portfolio. Buy below $64  

Commodity Update

Crude is determined to make another run at the $40/bbl support mark, with West Texas Intermediate (WTI) falling $5.02 since our previous issue to $41.57/bbl. Brent crude is down $5.44 to $44.12/bbl. Plentiful inventories continue to weigh on the near-term outlook for natural gas, which dropped another $0.03/MMBtu since our previous issue to $2.29/MMBtu.

In Other News

• Following years of delays, TransCanada (NYSE, TSE: TRP) requested an indefinite suspension of the Keystone XL pipeline review by the U.S. State Department

• The Obama Administration responded by formally rejecting the pipeline proposal on the grounds that it wouldn’t serve U.S. national interests

• In the wake of the decision the EIA announced “crude oil from Alberta will continue to be shipped by rail”

• China has admitted it has been burning up to 17% more coal than previously reported

• A new study by the National Bureau of Economic Research concludes that the U.S. oil and gas boom added about 725,000 jobs nationwide between 2005 and 2012

• Money managers’ net-long position in WTI crude rose 20% last week, the most in seven months.