We watched former President Trump’s 93-minute acceptance speech at the 2024 Republican National Convention (the longest in convention history). On the surface, the Republican platform is positive for traditional energy and negative for clean energy stocks, but things aren’t always as they seem. Let’s take a closer look.
TRADITIONAL ENERGY:
From the 2024 Republican Party Platform:
Reliable and Abundant Low-Cost Energy
“Republicans will increase Energy Production across the board, streamline permitting, and end market-distorting restrictions on Oil, Natural Gas, and Coal. The Republican Party will once again make America Energy Independent, and then Energy Dominant, lowering Energy prices even below the record lows achieved during President Trump’s first term.”
POSITIVES FOR FOSSIL FUELS (OIL, NATURAL GAS, AND COAL):
The pause on granting new liquefied natural gas (LNG) export licenses is likely to be immediately lifted
positive for natural gas
EPA restrictions on power plant emissions that require CO2 sequestration may be overturned
positive for natural gas and coal (read our market commentary, All Aboard the Train to Clean Energy)
Policies enacted that that support Artificial Intelligence (AI) and crypto mining should result in greater power needs
positive for natural gas and coal (also for nuclear, and renewables)
Cancellation of the electric vehicle mandate
positive for oil, e.g. gasoline consumption
“Drill Baby Drill” policies to increase oil and natural gas production
positive for oil and natural gas
At SAM Partners, we continue to own the stocks of those companies that are poised to benefit from the secular growth in natural gas consumption and exports. These include Cheniere Energy, Inc. (NYSE: LNG), Energy Transfer LP (NYSE: ET), Kinder Morgan, Inc. (NYSE: KMI), and Williams Cos., Inc. (NYSE: WMB).
From the 2024 Republican Party Platform:
Crypto and AI
“We will repeal Joe Biden’s dangerous Executive Orders that hinders AI Innovation and imposes Radical Leftwing ideas on the development of this technology. In its place, Republican support AI Development rooted in Free Speech and Human Flourishing.”
“Republicans will end Democrat’s unlawful and un-American Crypto crackdown and oppose the creation of a Central Bank Digital Currency. We will defend the right to mine Bitcoin, and ensure every American has the right to self-custody of their Digital Assets and transact free from Government Surveillance and Control.”
“DRILL BABY DRILL” CRINGE“
Drill Baby Drill” is frequently shouted by Mr. Trump and will likely lead to more active leasing on federal lands and an easing of regulations. The pause on granting new LNG export licenses (read our market commentary, The Time Has Come To Revisit MLPs) is likely to be immediately lifted in a new Trump presidency and costly EPA regulations such as those that require CO2 sequestration by coal and new gas-fired power plants will likely be scuttled.
However, several misperceptions are worth highlighting.
We do believe that streamlining regulations can indeed lower prices and permitting reform is necessary to build energy infrastructure such as transmission lines and pipelines. The latter will be required to increase natural gas production from the Appalachian region to support growth in LNG exports and increased demand for natural gas from electrification (read our market commentary, Outlook on Energy, a Bullish View).
We feel obligated to point out that America has been Energy Independent every year since 2019. The U.S. does import some crude oil to support refinery specifications but is a net exporter of energy and is already dominant in oil, natural gas, and natural gas liquids production and exports.
OUR TAKE
“Drill Baby Drill” is unlikely to lead to more oil and gas production in the near term, in our view. The primary governor on drilling is producing companies’ financial discipline. Experience over the past several years has taught companies that they are rewarded for generating attractive returns on investment and returning cash to shareholders. They have been penalized for spending above their cash flow and generating subpar returns while pursuing production growth for the sake of production growth. Note that management compensation plans have been revised from rewarding production growth to rewarding return on capital targets.
Conclusion: Energy Companies will remain financially disciplined. In other words, don’t mess with what is working.
CLEAN ENERGY:
From the 2024 Republican Platform:
Unleash American Energy
“Under President Trump, the U.S. became the Number One Producer of Oil and Natural Gas in the World – and we will soon be again by lifting restrictions on American Energy Production and terminating the Socialist Green New Deal. Republicans will unleash Energy Production from all sources, including nuclear, to immediately slash inflation and power American homes, cars, and factories with reliable, abundant, and affordable Energy.”
The Republican platform clearly states that it wants to terminate the Socialist Green New Deal, but what does that exactly mean? Most at risk are provisions in the Inflation Reduction Act (IRA) of 2022 aimed at accelerating the adoption of electric vehicles.
While eliminating electric vehicle mandates is clearly cited in the Republican Platform, renewable incentives, such as tax credits for wind and solar were not. In a recent note, “Can’t Trump the Power Mega-Trend,” Evercore ISI points out that over $200 billion has been spent on IRA driven clean energy related investments, nearly 80% of which is in Republican Congressional Districts.
To be clear, we believe that the decarbonization train will not be derailed, but perhaps delayed in some circumstances. In our view, utilities such as NextEra Energy, Inc. (NYSE: NEE) and The AES Corp. (NYSE: AES) that are major developers of wind and solar projects are likely to continue to prosper, as will independent power producers of nuclear energy such as Constellation Energy Corp. (NYSE: CEG) and Vistra Corp. (NYSE: VST).
OUR TAKE
While the election results could be supportive to oil and gas production and infrastructure development in the U.S., the long-term transition to clean energy will not be derailed. Key red states are major beneficiaries of IRA investments and major U.S. corporations (including the large tech firms investing in AI and data centers) are committed to decarbonization. We don’t see that changing no matter which party wins the November election.
IRA Investment by District
Source: US DOE, Evercore ISI Research
OVERRULING OF THE CHEVRON DEFERENCE DOCTRINE IS A POTENTIAL BLOW FOR CLEAN ENERGY
On June 24th, the Supreme Court overruled the Chevron Deference Doctrine in the case of Loper Bright Enterprises vs. Raimondo. Under the doctrine, courts were allowed to defer to federal agencies to interpret ambiguous statutes. The majority Supreme Court decision held that resolving statutory ambiguity is a federal judicial function, not an agency prerogative.
With the Supreme Court’s ruling striking out Chevron Deference, the Environmental Protection Agency’s (EPA) regulatory efforts to curb climate change are likely to be challenged. The latter development is also a potential negative for U.S. climate action and hence, clean energy.
As cited in the 7/2/24 Morgan Lewis publication, the law firm believes that the ruling puts recently enacted regulations at risk:
“In the environmental context, this includes a number of important laws and programs such as the recently adopted amendments to National Environmental Policy Act regulations; the EPA’s fossil fuel regulations for power plants as well as its tailpipe emissions and Corporate Average Fuel Economy standards; the Bureau of Ocean Energy Management’s offshore wind regulations; Toxic Substances Control Act (TSCA) risk evaluations; numerous regulations interpreting the climate change provisions in the Inflation Reduction Act; and regulations related to per- and polyfluoroalkyl substances under the Safe Drinking Water Act, Comprehensive Environmental Response Compensation and Liability Act, Resource Conservation Recovery Act, and the TSCA.”
JUNE REVIEW: UTILITIES RETREAT AS MARKET CONTINUES TO POST MONTHLY GAINS
The rundown:
SAM’s Infrastructure Income Portfolio produced a return (net of fees) of 2.2% compared to 3.6% for the S&P 500 and -4.5% for its customized benchmark as of 6/28/24.
SAM’s Energy Transition Portfolio generated a return (net of fees) of -2.4% versus -6.6% for its customized benchmark as of 6/28/24.
Midstream was down in June with a total return of -2.3%, as measured by the Alerian Midstream Energy Index (AMNAX).
Utilities and the clean energy sector underperformed, generating a total return of -5.9% and -9.8%, as measured by the Philadelphia Stock Exchange Utility Index (XUTY) and the S&P Global Clean Energy Index (SPGTCLTR), respectively.
In June, 5 out of 11 sectors in the S&P 500 reported a positive performance with information technology as the best performer and utilities as the worst. Energy delivered a -1.3% monthly total return. June month-end WTI crude oil and Henry Hub natural gas prices were $82.83 per Bbl and $2.42 per MMBtu, up ~5% and ~36%, respectively from last month.
2024 Year-To-Date Total Return
Source: Bloomberg, NASDAQ and S&P Global
RESULTS: SINCE INCEPTION & ONE YEAR
SAM’s Infrastructure Income Portfolio produced a return (net of fees) of 90.9% and 20.2% for the periods since 11/10/20 inception and 1-year, respectively. This compares to a total return of 73.9% and 8.5%, respectively, for its customized benchmark and 63.0% and 24.6%, respectively, for the S&P 500 as of 6/28/24.
SAM’s Energy Transition Portfolio generated a return (net of fees) of 8.4% and -0.04% for the periods since 4/29/21 inception and 1-year, respectively. This compares to a total return of 3.9% and -4.7%, respectively, for its customized benchmark and 36.2% and 24.6%, respectively, for the S&P 500 as of 6/28/24.
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 greater than 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.
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