Market Commentary: The Assault on Fossil Fuels is Over

Don’t let the relative underperformance of the energy sector this year—driven by lower oil and natural gas prices—dissuade you from owning energy stocks, particularly natural gas stocks. In this market commentary, we highlight that the assault on fossil fuels is over (at least for now and in the U.S.). The pendulum has swung from “clean energy at any cost” to a more pragmatic stance that once again favors fossil fuels, particularly natural gas.

This could not be better captured than by a recent quote from U.S. Environmental Protection Agency (EPA) Administrator, Lee Zeldin:

“Affordable, reliable electricity is key to the American dream and a natural byproduct of national energy dominance. According to many, the primary purpose of these Biden-Harris administration regulations was to destroy industries that didn't align with their narrow-minded climate change zealotry. Together, these rules have been criticized as being designed to regulate coal, oil and gas out of existence.”

Notice what’s missing? Zeldin emphasizes affordable and reliable but leaves out clean. That doesn’t mean the abandonment of cleaner energy initiatives by oil and gas companies—far from it (please see our last month’s Market Commentary: A Fair and Balanced Look at Clean Energy). Indeed, these companies continue to focus on producing cleaner-burning fossil fuels and projects such as carbon capture and sequestration which generate attractive returns on investment. The main takeaway from this is that the lifting of impediments to increased fossil fuel use is resulting in lower costs and faster speed to market.

GAS STOCKS HANGING IN DESPITE PULLBACK IN COMMODITY PRICES

The performance of natural gas-focused midstream c-corps has performed well despite natural gas prices falling below the $3 per MMBtu—this contrasts with the broader S&P 500 energy sector that is just barely treading water above the breakeven mark. We note that an equally weighted composite of natural gas stocks (DTM, KMI, LNG and WMB) is up ~7% year-to-date relative to a ~24% decline in gas prices, and ~9% increase for the S&P 500.  Unsurprisingly, stock performance shows little correlation to gas prices over the past one, two, and three years. (See chart below.)

Source: Bloomberg as of 8/20/25

This low correlation makes sense because these natural gas companies’ earnings are volume dependent and not price dependent. They have little to no commodity price risk, while the outlook for growing natural gas consumption is very positive. There are two main drivers to the natural gas story, growth in natural gas exports and data center power demand. However, the exuberance tied to natural gas as a data center/artificial intelligence (AI) trade has seemingly faded even as midstream natural gas companies provided a positive outlook during their second quarter earnings calls. Specifically, management teams highlighted a growing list of potential opportunities to serve this market. To us, this presents a buying opportunity.

Sam Partners’ Infrastructure Income and Energy Transition portfolios favor natural gas focused midstream energy companies. In addition to the four c-corps in the natural gas composite discussed above, Energy Transfer Partners (NYSE: ET), an MLP, has significant natural gas operations and is actively pursuing data center opportunities. As a side note, we believe that the relative underperformance of MLPs relative to c-corps is unwarranted and presents excellent investment opportunities.

EPA PROPOSES REPEAL OF OBAMA-BIDEN ERA REGULATIONS

The EPA’s core mission as stated on its website is “protecting human health and the environment, while committing to commonsense policies that drive down prices, unleash American energy, advance permitting reform and cooperative federalism, make America the AI capital of the world, and revitalize the auto industry.”  The agency has a number of initiatives underway in pursuit of its core mission.

1.   Proposal to repeal Obama and Biden Administrations’ regulations on power plants  

In June, the EPA proposed repealing both the 2015 emissions standards for new fossil fuel-fired power plants issued during the Obama-Biden Administration, and the 2024 rule for new and existing fossil fuel-fired power plants issued during the Biden-Harris Administration. When fully implemented, these regulations set emission standards that would have required 90% carbon capture for new and existing power plants, effectively making it prohibitively expensive for natural gas and coal-fired power plants to comply with.

The rationale? This repeal is based on a new interpretation that greenhouse gas (GHG) emissions from electric generating units do not make a “significant contribution” to dangerous air pollution under the Clean Air Act, removing the legal basis for such regulations. The EPA estimates that the repeal will “save the power sector $19 billion in regulatory costs over two decades beginning in 2026, or about $1.2 billion a year.” Additionally, “the proposed repeal of the 2024 Mercury and Air Toxic Standards (MATS) Amendments would save $1.2 billion in regulatory costs over a decade, or about $120 million a year” and result in deferring the shut-down of coal-fired power plants.

OUR TAKE: The potential repeal of EPA regulations for power plants is a big win for the natural gas and coal industries. Utilities should also benefit from cost savings from less stringent regulatory requirements. However, it will likely slow the rapid adoption of wind and solar plants.

2.   Clean Water Act Section 401 certification process is under review

In an August 5^th Boston Globe editorial, “Building the Constitution Pipeline is vital for New England’s grid stability,” EPA Administrator Zeldin strongly advocates for the construction of Williams Cos.’ Constitution Pipeline that would transport natural gas from Pennsylvania to New York. The Federal Energy Regulatory Commission (FERC)-approved project was stymied in 2016 when then Governor Andrew Cuomo denied a water quality permit under Section 401 of the Clean Water Act. Zeldin posits that the certificate denial was more about promoting renewables than protecting water. He further points to New England’s reliance on natural gas for power, the lack of pipeline infrastructure, and constrained supplies for resulting in higher costs for consumers. To address state overreach, the EPA has initiated a public comment period addressing critical portions of the regulations for the Clean Water Act Section 401 certification process. The agency’s goal is to ensure that the scope of state review on pipeline infrastructure is appropriately limited to water quality.

OUR TAKE: If critical infrastructure is not allowed to be constructed, there will be power shortages and rolling blackouts (e.g., California), resulting in higher costs for consumers. Permit reform is needed at the federal, state, and local levels to ensure infrastructure projects are built in a timely manner. Frivolous lawsuits and court delays add unnecessary costs and can derail critically needed projects. 

3.   Proposal to repeal the 2009 Greenhouse Gas Endangerment Finding

At the end of July, the EPA announced its proposal to rescind the 2009 Greenhouse Gas Endangerment Finding. In December 2009, current and projected levels of six greenhouse gases [carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfur hexafluoride (SF6)] in the atmosphere were deemed as a threat to the public health and welfare of current and future generations.

The agency estimates that the elimination of $1 trillion of regulations would result in $54 billion of annual savings through the repeal of all greenhouse gas standards including the Biden-Harris Administration’s electric vehicle (EV) mandate. If the proposed changes are approved, the EPA stated that “engine and vehicle manufacturers would no longer have any future obligations for the measurement, control, and reporting of GHG emissions for any highway engine and vehicle, including model years manufactured prior to this proposal.” A public hearing on this issue was scheduled for August 19 and 20, 2025. 

OUR TAKE: The potential repeal of the 2009 Endangerment Finding would further delay the U.S.’ EV transition, which has been occurring at a much slower pace than the rest of the world. This supports a slower than previously expected domestic decline in gasoline demand and traditional energy infrastructure – a positive for U.S. E&P and midstream companies.  EVs accounted for ~10% of U.S. new-car sales in 2024. This compares to an EV market share of one in five new cars sold in Europe and almost half of all car sales in China in 2024, according to the International Energy Agency (IEA).

US GHG Emissions by Major Emitting Sector (in million metric tons CO2-equivalent)

Source: Rhodium Group

A LOOK AT LEVELIZED COST OF ENERGY (LCOE)

This month revisiting the LCOE metric after receiving feedback on our July commentary. Specifically, we noted in our last report that “wind and solar are now economic in the U.S. and no longer require subsidies to support growth. This is evident in Lazard’s June 2025 LCOE Report.” In retrospect, our statement did not properly highlight the nuances and complexities involved in comparing the LCOE of different energy sources.

LCOE measures lifetime power generation costs divided by power generation production.

An observer noted (and we wholeheartedly agree) that intermittency needs to be accounted for when variable renewable energy (VRE including solar and wind) is compared to dispatchable resources. Currently, the LCOE calculation does not take this or other factors into consideration (e.g., the cost of battery storage to achieve the same level of reliability, required investments in energy transmission capacity) to make it an apples-to-apples cost comparison of different generation sources. Let’s also consider dispatchability, i.e., generating electricity when it’s needed and grid reliability as well as the social cost of carbon.

In the paper published by the Clean Air Task Force, “ Beyond LCOE: A Systems-Oriented Perspective for Evaluating Electricity Decarbonization Pathways”, the organization argues that “while LCOE is a good metric to track historical technology cost evolution, it is not an appropriate tool to use in the context of long-term planning and policymaking for deep decarbonization.” The report notes that the LCOE of solar and the LCOE of solar plus battery storage does not represent the total cost of power generation. This is evident in the chart below, which shows a higher LCOE under a wholesale system supply perspective.

Source: CATF – Beyond LCOE: A Systems-Oriented Perspective for Evaluating Electricity Decarbonization Pathways published May 2025

OUR TAKE: Wind and solar should be seen as part of the solution to meeting the growing global demand for power, rather than as a competing solution in isolation. We believe an inclusive approach (with natural gas continuing as a key contributor) is warranted.

JULY REVIEW: MARKET CONTINUES TO POST RECORD HIGHS

The rundown:

• In July, SAM’s Infrastructure Income Portfolio produced a return (net of fees) of -1.1% compared to 2.2% for the S&P 500 and 0.8% for its customized benchmark. The underperformance relative to benchmark reflect our lower weights in the utilities and clean energy sectors. Year-to-date, SAM’s Infrastructure Income Portfolio produced a return (net of fees) of 4.5% compared to 8.6% for the S&P 500 and 9.1% for its customized benchmark.

  
  

• In July, SAM’s Energy Transition Portfolio generated a return (net of fees) of 2.6% versus 1.8% for its customized benchmark. Year-to-date, SAM’s Energy Transition Portfolio generated a return (net of fees) of 4.8% versus 13.3% for its customized benchmark.

  
  

• SAM’s portfolios are more heavily weighted in Midstream, which underperformed relative to the clean energy sector and utilities in July and year-to-date.

  
  

• Midstream underperformed the overall market and was down in July and year-to-date with a total return of -1.3% and 3.7%, respectively, as measured by the AMNAX.

  
  

• In July, utilities and the clean energy sector outperformed the overall market, generating total returns of 4.8% and 3.0%, as measured by the Philadelphia Stock Exchange Utility Index (XUTY) and the S&P Global Clean Energy Index (SPGTCLTR), respectively. Year-to-date, XUTY and SPGTCLTR generated total returns of 15.0% and 19.4%, respectively.

  
  

• Sector performance in the S&P 500 was mixed with six out of eleven sectors posting positive performance. Information technology was the best performer and health care was the worst. Energy delivered a 2.2% monthly total return. July month-end WTI crude oil and Henry Hub natural gas prices were $70.36 Bbl and $2.99 per MMBtu, up ~6% and down ~8%, respectively from last month.

RESULTS: SINCE INCEPTION & ONE YEAR

• SAM’s Infrastructure Income Portfolio produced a return (net of fees) of 140.6% and 23.8% for the periods since 11/10/20 inception and 1-year, respectively. This compares to a total return of 129.8% and 17.6%, respectively, for its customized benchmark and 91.9% and 16.3%, respectively, for the S&P 500 as of 7/31/25.

• SAM’s Energy Transition Portfolio generated a return (net of fees) of 29.5% and 17.3% for the periods since 4/29/21 inception and 1-year, respectively. This compares to a total return of 29.7% and 9.9%, respectively, for its customized benchmark and 60.4% and 16.3%, respectively, for the S&P 500 as of 7/31/25.

 2025 Year-to-Date Total Return as of 7/31/25

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% 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 adviser 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.