Market Commentary: Companies Own Their Capital Allocation Decisions

THE POTTERY BARN RULE: YOU BREAK IT, YOU OWN IT

The phrase “you break it, you own it” has recently been invoked as a warning against the U.S. pursuing regime change in Venezuela (and perhaps Iran) and facing unintended consequences. Perhaps a poor analogy geopolitically, we believe it applies well to company management teams. Management owns the decisions it makes; investors, by contrast, can sell their stock and move on.

Some of the most important decisions companies must make relate to capital allocation—how much of earnings should be retained and reinvested in capital projects versus returned to shareholders. Does it make sense to use debt to supplement earnings and cash flow to fund both growth and dividends? At SAM Partners, we believe companies that make optimal capital allocation decisions are best positioned for success.

So, we worry that the current environment makes it difficult for companies to make sensible capital allocation decisions that have long-term consequences. One former CEO of an interstate pipeline company described the regulatory landscape this way: “It’s like having a big lead in the first half of a football game and after half time finding out that the rules of the game have changed.”

Interior Secretary Doug Burgum, co-head of the National Energy Dominance Council, in a CNBC interview this past week said that “energy dominance is energy abundance.” The implications are clear. To be energy dominant, the country must produce more energy. More of anything results in lower prices. Lower energy prices make the U.S. more competitive in the artificial intelligence (AI) race, reduces inflation, and addresses the affordability issue. The latter may be the number one voter issue in the upcoming midterm election. 

UNINTENDED CONSEQUENCES: REGIME CHANGE IN VENEZUELA

Recent media coverage has raised concerns about potential regime change in Venezuela. We believe this reaction is overblown. At a minimum, we hope the administration has learned from past mistakes, including the chaos following the Iraq war. While regime change may eventually occur, it does not appear imminent. More likely, the objective is to rebuild Venezuela’s once-dominant oil infrastructure.

Oil Production in Venezuela from 1990 – 2024 (in thousands of barrels per day)

Source: USA Today, Energy Institute Statistical Review

As has been widely reported, Venezuela has the world’s largest deposit of oil reserves—around 300 billion barrels. Yet production has collapsed from roughly 3.5 million barrels per day to less than 1 million barrels per day due to mismanagement and government expropriation. President Trump is jawboning American energy companies to invest an aggregate of at least $100 billion in Venezuela to restore the country’s oil production. Today, only Chevron Corp. (NYSE: CVX) operates in the country; Exxon Mobil Corp (NYSE: XOM) and ConocoPhillips (NYSE: COP) vacated the country after their assets were expropriated by the Venezuelan government.

OUR TAKE: THE COUNTRY IS “UNINVESTABLE” That word was unfortunately uttered by XOM’s CEO, Darren Woods at the White House meeting on January 9, 2026. As alluded to in the first paragraph, companies own their capital allocation decisions. The upside to investing in Venezuela is substantial but so are the risks of expropriation and safety of company employees. Those risks must be mitigated before an exploration and production company commits people and billions of shareholders’ money.

Experts believe it will take several years of investment to significantly increase Venezuelan oil production. Near-term, the beneficiaries are likely to be the oilfield services companies such as SLB Inc. (NYSE: SLB) that has been continuously operating in the country and Halliburton (NYSE: HAL). Jeff Miller, CEO of Halliburton told the Financial Times that his company could quickly reengage in Venezuela. He noted that HAL’s assets move around unlike oil and gas operators’ who are putting assets in the ground for 20 years.

Additionally, the refiners such as Valero Energy (NYSE: VLO), Marathon Petroleum (NYSE: MPC), and Phillips 66 (NYSE: PSX) that can process Venezuelan crude may benefit from a cheaper supply source.

TRUMP CALLS FOR EMERGENCY POWER AUCTION TO BUILD BIG POWER PLANTS AGAIN

The shares of independent power producers (IPPs) got slammed on Friday (1/16/26) after the Trump administration and 12 Mid-Atlantic governors called on the PJM Interconnection, LLC* to temporarily overhaul its market rules and hold an emergency procurement auction.

The goal here is to increase baseload power generation to strengthen grid reliability and reduce electricity costs for consumers; essentially addressing the affordability issue. The narrative has dramatically shifted in the last couple of years as fears of climate change has been replaced by concerns of rising electricity prices and affordability. According to the U.S. Bureau of Labor Statistics, average electricity prices rose 6.7% for the 12-months period ended December 2025, more than twice overall inflation of 2.7% as measured by the consumer price index (CPI). To be fair, gasoline prices declined 3.4% over this period due to lower oil prices. To quote from the Department of Energy’s (DOE) release:

Today’s direction includes: 

• Providing long-term certainty for new power generation: Provide 15-year revenue certainty for new power plants to accelerate the development of reliable power generation.

• Protecting residential electricity rates: Protect ratepayers by limiting the amount existing power plants can be paid in the PJM capacity market.

• Ensuring data centers pay their fair share: Make data centers pay more for new generation than residential customers by allocating costs for any new generation procured to data center customers that have not self-procured new capacity or agreed to be curtailable.

• Prioritizing immediate grid stability: Take other steps to ensure more affordable, reliable, and secure electricity for the American people.

*PJM Interconnection, L.L.C. (PJM) is a regional transmission organization that coordinates the movement of wholesale electricity in all or parts of 13 states (i.e., Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia) and the District of Columbia.

OUR TAKE: THE SHARE PRICE DECLINE OF THE IPPS WAS AN OVERREACTION

(SAM Partners has positions in Constellation Energy (NYSE:CEG) and Vistra Corp. (NYSE: VST)

The rationale for the stock price declines is (again) more supply means lower power prices and lower profitability. That appears to be a stretch given power demand projections and the fear that power generation won’t be able to keep up with demand. According to BloombergNEF, data center energy demand is forecast to triple from 34.7 gigawatts (GW) in 2024 to 106 GW by 2035.

Additionally, we like the IPPs’ initiative to sign long term power agreements to improve their stability of earnings and reduce reliance on the spot market. Getting back to the theme of this market commentary, companies own their capital allocation decisions, the IPPs prefer buying power generation assets at prices well below the cost of building new generation. For example, VST has recently entered into agreements to purchase natural gas power plants at ~$730/kW of capacity (1/5/26 press release) versus the cost of a newbuild that is 2 or 3 times higher. Companies have learned from past industry mistakes and recognize that past cycles have ended poorly when demand did not materialize to justify the capital invested in new capacity.

ELECTRICITY PRICES AND POLICY TRADEOFFS

One more observation regarding electricity prices: there are unintended consequences when government policy upends competitive market signals. A major reason for the rise in electricity prices has been an unpragmatic approach to the noble aspiration of decarbonization or cleaner energy.

The DOE points out that 60,031.1 MW of power generation has been and is planned to be retired between 2011 and 2028 in PJM, 71.1% of which is from coal fired steam units. The baseload generation has been partially replaced by intermittent power sources such as wind and solar. Batteries will play an important part in addressing the intermittency problem, but in the meantime, a more balanced, pragmatic, and measured approach is advised.

PJM Generation Fuel Mix

As of January 19, 2026. Source: https://www.pjm.com

In addition, permit reform seems to have gained bi-partisan support and may pass this year while not talked enough about, tort reform should also be revisited. Frivolous lawsuits that cause needless delays and project cost escalations create significant obstacles to the buildout of needed infrastructure.

There is a sense of urgency to incentivize the building of new generation not only to arrest the rise in electricity prices but at least as important, to ensure reliability of the system. PJM’s latest auction held in December failed to procure enough committed capacity to meet the one-event-in-10-year reliability standard of a 20% reserve margin. The auction resulted in a reserve margin of just 14.8%. Power generation supply additions aren’t keeping up with forecasted data center demand that require power 24/7 365 days every year.

PJM Capacity Prices Climb for a Third Straight Year in the 2027/2028 Auction

Source: PJM Interconnection

ENERGY DISCIPLINE HOLDS AS MIDSTREAM SPENDING RISE

The Trump administration evidently believes that the streamline of regulations and productivity gains can both result in lower prices and increased production. However, we don’t believe that the President’s aspirational target of $50 oil price is high enough to stimulate enough drilling activity to increase U.S. oil production let alone maintain current production. The paradox is lower prices reduces investments for companies that focus on earning appropriate returns on capital investments. Hence, we have not seen a notable increase in the capital budgets of oil and gas companies

The narrative has shifted among investors. They are less concerned about the terminal value of midstream energy companies recognizing that oil and especially natural gas demand is likely to continue growing into the foreseeable future. Several years ago, midstream companies were punished if they increased growth capital expenditures as investors preferred that companies shrink their balance sheets and increase share repurchases. The focus was on generating free cash flow (cash flow less capital expenditures).

Midstream Infrastructure Spend

 Source: Wells Fargo Securities, LLC Midstream Monthly Outlook: January 2026 published on 1/5/26

Today’s companies are rewarded for announcing growth projects if they have demonstrated a track record of producing attractive returns on capital deployed and are not eroding their credit ratings by taking on too much debt. Thus far, the midstream sector has demonstrated fiscal prudency, return on invested capital has trended higher even as growth capital expenditures have increased, balance sheets are in good shape, and more capital is being returned to shareholders via dividend increases and share repurchases. The caveat is that the sector has a history of building too much capacity that erodes returns on investments and indeed that may be the case with investments in crude oil and NGL pipelines.

On the other hand, construction of natural gas pipelines appears prudent at this juncture to evacuate natural gas from the Permian and Haynesville basins to meet growing demand from LNG exports.

Midstream Returns on Invested Capital (ROIC) Over Time

Source: Wells Fargo Securities, LLC Midstream Monthly Outlook: January 2026 published on 1/5/26

At SAM Partners, our favorite stocks are those that are investing in natural gas infrastructure. These are DTM, ET, KMI, LNG, and WMB. The value proposition for midstream companies remains income and growth. SAM Infrastructure Portfolio has a yield of ~4.5% with dividend growth of ~5 to 7%.

DECEMBER REVIEW: ENERGY HOLDS STEADY

The rundown:

• In December, SAM’s Infrastructure Income Portfolio produced a return (net of fees) of -2.0% compared to 0.1% for the S&P 500 and -1.6% for its customized benchmark. In 2025, SAM’s Infrastructure Income Portfolio produced a return (net of fees) of 5.5% compared to 17.9% for the S&P 500 and 15.9% for its customized benchmark. The performance relative to benchmark reflect our overweight in midstream and lower weights in the utilities and clean energy sectors.

• In December, SAM’s Energy Transition Portfolio generated a return (net of fees) of -1.5% versus -1.9% for its customized benchmark. In 2025, SAM’s Energy Transition Portfolio generated a return (net of fees) of 6.4% versus 28.0% for its customized benchmark.

• SAM’s portfolios are more heavily weighted in Midstream, which outperformed relative to the clean energy and utilities sectors in December and underperformed these sectors in 2025.

• Midstream underperformed the overall market and was down in December with a total return of -0.3% as measured by the AMNAX. In 2025, midstream underperformed the market with a total return of 5.0%.

• In December, clean energy sector underperformed the overall market, generating a total return of -2.2% as measured by the S&P Global Clean Energy Index (SPGTCLTR). For the month, utilities also underperformed with a total return of -4.9% as measured by the Philadelphia Stock Exchange Utility Index (XUTY). In 2025, SPGTCLTR and XUTY generated total returns of 47.3% and 17.1%, respectively.

  
  

• Sector performance in the S&P 500 was largely positive with eight out of eleven sectors posting positive performance. Communication Services was the best performer and Consumer Discretionary was the worst. Energy delivered a 0.2% monthly total return. December month-end WTI crude oil and Henry Hub natural gas prices were $57.26 Bbl and $4.00 per MMBtu, down ~-2% and ~-13%, respectively from last month.

RESULTS: SINCE INCEPTION & ONE YEAR

SAM’s Infrastructure Income Portfolio produced a return (net of fees) of 142.9% and 5.5% for the periods since 11/10/20 inception and 1-year, respectively. This compares to a total return of 135.8% and 15.9%, respectively, for its customized benchmark and 108.3% and 17.9%, respectively, for the S&P 500 as of 12/31/25.

SAM’s Energy Transition Portfolio generated a return (net of fees) of 31.6% and 6.4% for the periods since 4/29/21 inception and 1-year, respectively. This compares to a total return of 38.2% and 28.0%, respectively, for its customized benchmark and 74.1% and 17.9%, respectively, for the S&P 500 as of 12/31/25.

2025 Total Return

Source: Bloomberg, NASDAQ and S&P Global

Sam Partners’ Infrastructure Income and Energy Transition Strategies seek to provide sustainable income and growth with capital preservation. This is accomplished by investing in a concentrated portfolio of high-quality midstream energy companies, utilities and clean energy companies that are well positioned to participate in the energy transition to a net zero carbon future. A diversified approach to investments across these sectors should optimize risk-adjusted returns, in our view. Our Infrastructure Income Strategy offers investors a current yield of ~4.5% and growth potential of ~5-7%; while the Energy Transition Strategy that is more heavily weighted with clean energy stocks and aligns with favorable ESG ratings, offers investors a current yield of ~3.5%. In a world searching for yield, we believe these Strategies offer a compelling value proposition.

IMPORTANT DISCLOSURES

Siegel Asset Management Partners is a registered investment advisor located in Plainview, New York. The views expressed are those of Siegel Asset Management Partners and are not intended as investment advice or recommendation. This material is presented solely for informational purposes, and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness, or reliability. All information is current as of the date of this material and is subject to change without notice. Third-party economic, market or security estimates or forecasts discussed herein may or may not be realized and no opinion or representation is being given regarding such estimates or forecasts. Certain products and services may not be available in all jurisdictions or to all client types. Unless otherwise indicated, Siegel Asset Management Partners' returns reflect reinvestment of dividends and distributions. Indexes are unmanaged and are not available for direct investment. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results.