Trump vs. Biden: The Energy Sector Did Better under the Democratic Administration
We’re not kidding. The energy sector did much better under the Biden Administration. Perhaps counterintuitive, but the S&P 500 energy sector was the worst performer of the eleven S&P 500 sectors under the Trump Administration and the best under the Biden Administration. Midstream [as measured by the Alerian Midstream Energy Index (AMNA)] also did better under Biden. We will note, however, that the S&P 500 did do modestly better under Trump.
OUR ADVICE: Don’t get too caught up in the politics or the rhetoric. Stay focused on the secular trends that we believe will eclipse politics. We can’t predict extraneous events such as pandemics and Russia invading Ukraine, but we can invest based on fundamentals, and we’re very positive on the long-term outlook for natural gas demand. Please see our discussion with Micheal G. Dunn, EVP and COO of the Williams Companies, Inc. (NYSE: WMB).
We believe the number one reason for the poor performance of the energy sector during the first Trump years was “drill baby drill,” or put another way, “grow baby grow” without any serious regard to the resulting impact on companies’ return on capital invested. Indeed, oil production continued to grow rapidly as the shale revolution was well under way. However, the consequences of this undisciplined growth were lower oil prices, poor returns on capital employed, bloated balance sheets, and the destruction of shareholder wealth. Oh, and then COVID came along and for a brief period in April 2020 oil prices (West Texas Intermediate, WTI) were negative as economic activity ground to a halt.
Enter the Biden administration and a paradigm shift on how energy companies are managed. So, for all the negative fossil fuel rhetoric during the Biden Administration, the energy sector did quite well. Russia’s invasion of Ukraine sent oil and natural gas prices spiraling higher and underscored the idea that the world needs energy to survive and thrive. But the more durable factor is the paradigm shift in which companies are managed to generate attractive returns on capital invested and return cash to shareholders.
What is the lesson learned? Companies with disciplined financial strategies and strong management teams can adjust to changing circumstances and different administrations. The paradigm shift is working.
Performance During Presidential Administrations
Source: Bloomberg
A BRIEF HISTORY…
The S&P 500 Energy sector is dominated by oil and gas producers whose fortunes are closely tied to oil and gas prices. Oil prices did a round trip for Trump starting and ending around $53 per barrel. Under Trump, U.S. oil production rose from about 9.4 million barrels per day (b/d) in January 2017 to approximately 11.1 million b/d by January 2021. The narrative around fossil fuels toward the end of the Trump administration worsened while that for clean energy gained momentum as the Biden administration got underway. Under Biden, oil prices have averaged ~$75 per barrel and have drifted into a trading range of $65 to $80 per barrel. Following Russia’s invasion of Ukraine in February 2022, oil prices mostly traded above $100 per barrel until July of that year. However, unlike Russia’s exports of natural gas, there was no actual supply disruption of oil.
Although there was a deceleration in the growth of oil and natural gas production under Biden, the U.S. did produce record volumes of oil and natural gas in 2024 (over 13 million b/d of oil and about 105 billion cubic feet/d of natural gas). The U.S. also became the world’s number one exporter of liquefied natural gas (LNG) in 2023 and filled the natural gas void left by Russia for our European allies.
Price Performance Through Trump and Biden Administrations
Source: Bloomberg
UNDER THE SECOND TRUMP ADMINISTRATION:
Midstream likely to continue to shine
SAM Partners focuses primarily on the midstream or energy infrastructure sector. Midstream companies generally have very low sensitivity to commodity prices (i.e., no to little direct commodity price exposure). In general, a midstream company’s profitability is based on its capacity to move oil and gas volumes through its pipes. We expect midstream stocks to continue to do well under the second Trump administration.
Investors have realized that infrastructure companies, especially those transporting natural gas, fit well with the AI (artificial intelligence), data centers, and growth in power demand thematic. This positive outlook will not change under Trump. Midstream companies will build the required infrastructure to enable this thematic to play out and are poised to do very well over the long term, in our view. The best performing stocks in our Infrastructure Income Portfolio have been the natural gas focused companies such as DT Midstream, Inc. (NYSE: DTM) and Williams Cos. (NYSE: WMB).
New power plant EPA regulations likely to be eased
Earlier this month, President-elect Donald Trump nominated former U.S. Representative Lee Zeldin (R-New York) to lead the Environmental Protection Agency (EPA). Under Zeldin’s leadership, recently finalized EPA emissions rules for power plants could be eased. These rules, upheld by the Supreme Court last month, require coal plants operating beyond 2039 to cut emissions by 90% by 2032 through carbon capture and sequestration (CCS). New natural gas plants face similar standards, with a 90% capture requirement by 2035 or reduced capacity operations. Rolling back these regulations could encourage the construction of more natural gas plants.
More broadly, industry experts anticipate the Trump administration will attempt to rollback Biden’s climate and environment initiatives. This likely will include efforts to repeal certain provisions of the Inflation Reduction Act (IRA), most notable, the $7,500 tax credit for electric vehicles. However, Trump could face opposition to more wholesale changes given that most of the green initiative investments are earmarked to benefit Republican states. These would include tax credits for renewables (wind and solar) and more generous tax provisions (referred to as 45Q) for carbon capture, utilization, and sequestration (CCUS) projects.
FIRESIDE CHAT WITH MICHEAL G. DUNN
Who is WMB?
Williams owns and operates approximately 33,000-miles of pipeline infrastructure in the U.S. The company serves 12 key supply areas and handles approximately one-third of the nation’s natural gas.
KEY TAKEAWAYS FROM FIRESIDE CHAT:
1. Decade-long natural gas strategy. Williams (WMB) has leveraged its strategically located assets for over a decade to benefit from growing natural gas demand. With connections to all operational and planned LNG projects, and a gathering and processing (G&P) network across most basins (excluding Bakken), WMB has consistently outperformed its annual earnings growth targets of 5-7%, achieving ~8% in recent years through disciplined capital management.
2. Republican sweep could boost midstream sector. Management sees Republican control of Congress as a positive for midstream companies, including WMB, citing potential impacts such as:
Bipartisan support for permit reform to expedite pipeline and transmission line construction
Lifting the LNG export pause early in the new administration
Limiting third-party challenges to FERC rulings
Extending bonus depreciation to reduce cash taxes
Delaying EPA emissions regulations for power plants
Increasing lease sales in the Gulf of Mexico, boosting WMB’s offshore infrastructure utilization
3. Commitment to emissions reduction. A little-known fact is that the United States is the only signatory to the Paris Climate Accord that has met or exceeded its emissions reduction pledge. WMB will spend $1.3 billion through 2030 in its emissions reduction program to modernize its transmission infrastructure and reduce emissions. These low-risk projects, such as compressor replacements, also generate regulated returns for the company.
4. Strong natural gas demand outlook. Management expects robust growth in natural gas demand primarily through LNG exports (a doubling from current levels), data centers (growth from 22,000 megawatts to 45,000 megawatts by 2030) and coal to gas power plant conversions (10 Bcf/d of gas demand if all converted). Mr. Dunn points out that natural gas storage has not kept pace with the growth in demand and this may lead to more volatility in natural gas prices as demand fluctuates.
5. Gas prices likely in Goldilocks range. WMB’s (and the midstream sector) stock performance has been strong despite lackluster natural gas prices. Gas prices are likely to remain rangebound until new LNG export facilities are placed into service. Management noted that WMB’s exposure to gas prices is muted due to its "take or pay" pipeline contracts, which account for ~45% of its earnings, and diverse G&P footprint, which is tied to both dry and liquids-rich gas plays. Prices are expected to stay in a range that is high enough to generate attractive returns for producers without stifling demand. Drilling efficiencies have also made natural gas production profitable at prices as low as $2.00/MMBtu (e.g., EQT Corporation [NYSE: EQT]).
6. Strong execution on project returns with full backlog of opportunities. According to a recent report published by Wells Fargo equity research, WMB’s return on invested capital (ROIC) for the past five years was 22.9% vs. a return of 11.9% for its midstream peers. On the transmission side, the $10B level of potential projects has remained fairly stable and robust with $1.5-$2B of growth capex deployed annually.
Williams’ Portfolio of Deep and Diverse Set of Transmission Projects
Note: Project list as of September 1, 2024. Dekatherms converted to cubic feet at 1,000 cubic feet=1 dekatherm.
Source: Williams’ 3rd Quarter 2024 Earnings Call November 7, 2024 presentation
OCTOBER REVIEW: ENERGY HOLDS STEADY DESPITE OVERALL MARKET RETREAT
The rundown:
In October, SAM’s Infrastructure Income Portfolio produced a return (net of fees) of 3.3% compared to -0.9% for the S&P 500 and 0.9% for its customized benchmark. Year-to-date, SAM’s Infrastructure Income Portfolio produced a return (net of fees) of 29.5% compared to 21.0% for the S&P 500 and 23.6% for its customized benchmark as of 10/31/24.
In October, SAM’s Energy Transition Portfolio generated a return (net of fees) of 1.7% versus -3.8% for its customized benchmark. Year-to-date, SAM’s Energy Transition Portfolio generated a return (net of fees) of 14.0% versus 8.9% for its customized benchmark as of 10/31/24.
Midstream outperformed and was up in October with a total return of 5.7%, as measured by the AMNAX.
In October, utilities and the clean energy sector underperformed, generating a total return of -1.5% and -11.0%, as measured by the Philadelphia Stock Exchange Utility Index (XUTY) and the S&P Global Clean Energy Index (SPGTCLTR), respectively.
Except for financials, communication services and energy, all sectors in the S&P 500 reported negative performance with financials as the best performer and healthcare as the worst. Energy delivered a 0.8% monthly total return. October month-end WTI crude oil and Henry Hub natural gas prices were $69.58 Bbl and $1.82 per MMBtu, down ~3% and down ~29%, respectively from last month.
RESULTS: SINCE INCEPTION & ONE YEAR
SAM’s Infrastructure Income Portfolio produced a return (net of fees) of 111.6% and 36.1% for the periods since 11/10/20 inception and 1-year, respectively. This compares to a total return of 108.0% and 34.4%, respectively, for its customized benchmark and 71.0% and 38.0%, respectively, for the S&P 500 as of 10/31/24.
SAM’s Energy Transition Portfolio generated a return (net of fees) of 15.0% and 22.1% for the periods since 4/29/21 inception and 1-year, respectively. This compares to a total return of 18.8% and 22.3%, respectively, for its customized benchmark and 42.9% and 38.0%, respectively, for the S&P 500 as of 10/31/24.
2024 Year-To-Date 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 ~4.0% 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 4%. 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.
Comments