Market Commentary: Why Invest in Energy Stocks Now?

ENERGY STILL MATTERS—EVEN AT 3% OF THE S&P 500

The energy sector represents just 3% of the S&P 500’s market value. So, do investors really need to pay attention to the sector? The short answer is YES—there was a time when the sector represented more than 12%.

The S&P 500 Energy Sector includes subsectors that span the full range of energy business activities—from integrated oil and gas companies, exploration and production (upstream), processing, transportation, and storage (midstream), to refining and marketing (downstream). These companies are not homogeneous; each subsector has distinct characteristics. For example, upstream companies have commodity price risk—when oil prices fall, revenues shrink.

But even within E&P, there are natural gas–focused companies that can do well when gas prices are strong and oil prices are weak. At SAM Partners, we invest primarily in the midstream sector, with companies that have little to no commodity price risk. As one CEO told me years ago, “Our business model is quite simple. We make money from volume and fees.” If energy demand continues to rise, these companies’ earnings are likely to follow.

We cite several reasons why investors should consider investing in the midstream subsector.

1. Resilient business models. Midstream companies provide critical infrastructure services to both producers and consumers of energy and energy products. Demand for energy is relatively inelastic, and most midstream companies’ cash flows have proven resilient—or have even grown—through various business and commodity cycles. For example, see the chart below from Enterprise Products Partners’ (NYSE: EPD) recent presentation.

History of Cash Flow per Unit Durability

Source: Enterprise Products Partners 5-2025 Investor Deck

2. Hedge against inflation. Many midstream companies have inflation escalators built into customer contracts.

3. Organic growth opportunities. Growth is being driven by increasing power demand from artificial intelligence (AI) and data centers, as well as rising U.S. exports of liquefied natural gas (LNG) and liquefied petroleum gases (LPGs) such as propane and butane.

4. Attractive current yield and growing dividends. As of May 19th, the universe of midstream companies followed by Wells Fargo Securities Equity Research sported a median yield of 5%, three-year compound annual dividend growth of 5%, and dividend coverage of 1.8x. In our view, this potential total return of 10%+ screens very competitively against alternatives like fixed income and other equities.

5. Strong balance sheets. Many midstream companies have investment-grade balance sheets and generate free cash flow (cash flow from operations after capital expenditures) that can be used to further reduce debt and/or return capital to shareholders.

KEY TAKEAWAYS FROM FIRESIDE CHATS

We recently hosted fireside chats with the management teams of DT Midstream, Inc. (NYSE-DTM) and ONEOK, Inc. (NYSE-OKE). DT Midstream is an integrated pure-play natural gas midstream company while ONEOK is a diversified integrated midstream company that operates across multiple energy commodities that include natural gas, crude oil, and natural gas liquids (NGLs).

SOME IDEAS THAT CAME UP IN BOTH DISCUSSIONS:

1.      Disciplined production outlook. Large E&P customers are maintaining their 2025 production targets despite modest capex reductions. With oil near $60/barrel, some are trimming drilling budgets, but improved efficiency allows them to sustain output—in other words, they can do more with less.

2.      Natural gas demand is increasing. Demand from AI/data centers, industrial customers, and LNG facilities is significant and expected to grow well into the next decade. DT Midstream highlighted a Wood Mackenzie study that predicts natural gas demand increasing by nearly 17% by 2030.

U.S. Natural Gas Demand Forecast

Sources: Wood Mackenzie North America Gas Investment Horizon Outlook – April 2025, DT Midstream Company Presentation - May 2025

1.      Management anticipates little impact from higher tariffs.  Although the U.S.’ tariff policy is still evolving, the impact on the companies’ project costs is very small—in the 1-2% range.

2.      Supply push and demand pull is creating an abundance of organic growth opportunities.  Gas-to-oil production ratios (GORs) are increasing in major oil-producing regions such as the Bakken and Permian regions. So even if oil production does not grow, associated natural gas from existing oil production will increase. Additional infrastructure is required to accommodate the increase in supply (supply push demand from producers) and the market’s demand (demand pull) for natural gas.

3.      Companies are maintaining capital discipline. The focus remains on generating attractive returns and investment grade balance sheets.

COMPANY-SPECIFIC HIGHLIGHTS

DT Midstream Management: David Slater (President and CEO) and Jeff Jewell (CFO)

1.      Company transformed since 2021 spin-off. DTM’s pipeline segment is expected to contribute ~70% of adjusted EBITDA in 2025, up from just 55% in 2021. While the gathering segment is also growing, its contribution is expected to decrease to ~30% from 45%. This is significant because the pipeline segment generates more stable and predictable cash flows, and we would argue justifies a higher stock valuation.

1.      Win-win pipeline acquisition. DTM completed a $1.2 billion acquisition of three FERC-regulated Midwest interstate pipelines from ONEOK at the end of 2024. The deal was mutually beneficial—these pipelines were non-core for ONEOK but are a strategic fit for DTM. Management has already identified investment and commercial opportunities across the new footprint.

2.      Growing backlog of organic capital projects. DTM has identified ~$2.3 billion of probable capital projects with attractive returns of 5-8x EBITDA that support its long-term organic growth rate target of 5-7%. However, we suspect that based on the company’s track record of 10% growth, this target is likely to be exceeded. Additionally, the dividend growth target of 5-7% has been exceeded as the dividend has grown at an 8% annual compound growth rate.

3.      Assets well-positioned in the Haynesville and Appalachian Basins to serve growing natural gas demand. DTM’s Haynesville System connects to LNG facilities along the Gulf Coast and its Appalachian gathering assets can supply growing data center and utilities demand for natural gas. As shown in the chart below, natural gas production is forecasted to have substantial growth in DTM basins.

Production Forecast—DTM Basins

Sources: Wood Mackenzie North America Gas Investment Horizon Outlook – April 2025, DT Midstream Company Presentation - May 2025

4.      Goal to reach investment grade achieved. Following our fireside chat, Moody’s upgraded DTM’s debt to investment grade—a key strategic company goal.

5.      Cash flows support capital budget with no need for external financing. DTM has no debt maturing for four years and a weighted average debt maturity of ~6 years. Current cash flows support the capital budget with no need for external financing.

COMPANY SPECIFIC HIGHLIGHTS

ONEOK Management: Pierce Norton II (President and CEO) and Walter S. Hulse III (CFO)

1.      Transformational transactions. Since Pierce Norton became CEO in 2021, ONEOK has executed several strategic transactions. The most significant was the $19 billion acquisition of Magellan Midstream Partners in 2023, which added crude and refined product pipelines. That was followed in 2024 by acquisitions of EnLink Midstream, Medallion Midstream, and assets from Easton Energy.

2.      Value creation. To date, these acquisitions have either met or exceeded expectations. The following chart shows the incremental value OKE anticipates generating—above and beyond the standalone EBITDA projections each acquired company had in their five-year plans. Note that the value creation could top over $1 billion by 2027.

Combined ONEOAK Adjusted EBITDA vs. Standalone Forecasts (adjusted EBITDA $ in millions)

Notes: (a) Company standalone forecasts from the month prior to acquisition close, excluding synergies. (b) Excludes $286 million related to asset divestitures and $73 million of transaction costs. Includes $180 million related to accounting changes, including timing of earnings recognition and JV EBITDA calculation methodology updates. (c) Chart not to scale.

Source: ONEOK, Inc. First Quarter 2025 Results Presentation

3.      Resilient business model. OKE’s business resilience—highlighted by performance during the 2014–15 oil price collapse and the 2020–2021 COVID-19 period—reflects the strength of the midstream model.

4.      Joint venture with MPLX (NYSE: MPLX) adds LPG export capability.  ONEOK and MPLX entered a 50/50 joint venture to build a 400,000-barrel-per-day export terminal in Texas City and a new 24-inch pipeline from Mont Belvieu. OKE’s share of the $1 billion project, slated for early 2028 completion, fulfills a long-standing goal of extending its NGL value chain to the water.

5.      U.S. energy dominance. Mr. Norton was complimentary of the Administration’s efforts to promote U.S. energy dominance. Specifically, he referenced proactive discussions in which the Administration officials asked “how can we help” to streamline the regulatory process.

OUR PERSPECTIVE: The President’s messaging at times can be incongruous. It’s difficult to sustain U.S. energy dominance if oil prices are $50 per barrel, a level that doesn’t generate adequate returns for producers. Oil prices in the $50 range is not in concert with “Drill, baby, drill.”

PLEASE JOIN US FOR UPCOMING SAM FIRESIDE CHAT

Tuesday, June 3rd at 11:00 AM EST: John Porter (CFO) of the Williams Companies, Inc. (WMB)

LINK to register for this webinar.

TARIFFS AND OPEC+ TANK OIL PRICES

West Texas Intermediate (WTI) oil prices are down about $10 per barrel (bl) this year to $61/bl and have been as high as $80/bl earlier in the year. The decline since April was precipitated by proposed U.S. tariff increases on “Liberation Day”, and OPEC’s surprise move to triple the pace of production increases. Global inventory levels are rising from well below five-year averages as supply has begun to outpace demand. OPEC has sanctioned monthly increases of 411,000 bpd for both May and June, about triple the monthly plan agreed to in December 2024, while the International Energy Agency (IEA) and the U.S. Energy Information Administration (EIA) have reduced their 2025 demand forecasts by 300,000 bpd (to 730,00 bpd) and 400,000 bpd (to below 1 million bpd), respectively. This is well below average annual growth of 1.3 million bpd from 2000 to 2019.

However, it may not be that bad…

o   The Trump administration has softened its stance on tariff increases thus reducing the chances or severity of a recession.

o   OPEC+ production increases are likely to be far less than 400,000 bpd. The IEA has concluded that only Saudi Arabia has room to increase production given current levels of compliance (i.e., overproduction by Kazakhstan and Iraq) and assessed production capacity.

o   Sanctions on Russia, Iran, and Venezuela may be tightened. This could result in as much as 3 to 4 million bpd of oil being removed from the market.

APRIL REVIEW: ENERGY UNDERPERFORMS AS CRUDE OIL PRICES PULLS BACK

The rundown:

• In April, SAM’s Infrastructure Income Portfolio produced a return (net of fees) of -7.0% compared to -0.7% for the S&P 500 and -2.8% for its customized benchmark. Year-to-date, SAM’s Infrastructure Income Portfolio produced a return (net of fees) of -1.1% compared to -4.9% for the S&P 500 and 2.3% for its customized benchmark.

• In April, SAM’s Energy Transition Portfolio generated a return (net of fees) of -5.1% versus -0.3% for its customized benchmark. Year-to-date, SAM’s Energy Transition Portfolio generated a return (net of fees) of       -9.9% versus 2.9% for its customized benchmark.

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

• Midstream underperformed the overall market and was down in April with a total return of -5.6%, as measured by the AMNAX.

• In April, utilities and the clean energy sector outperformed the overall market, generating a total return of -0.6% and 3.5%, as measured by the Philadelphia Stock Exchange Utility Index (XUTY) and the S&P Global Clean Energy Index (SPGTCLTR), respectively.

• Sector performance in the S&P 500 was mixed with technology as the best performer and energy as the worst. Energy delivered a -13.6% monthly total return. April month-end WTI crude oil and Henry Hub natural gas prices were $59.55 Bbl and $3.12 per MMBtu, down ~17% and ~24%, respectively from last month.

RESULTS: SINCE INCEPTION & ONE YEAR

SAM’s Infrastructure Income Portfolio produced a return (net of fees) of 127.8% and 27.9% for the periods since 11/10/20 inception and 1-year, respectively. This compares to a total return of 119.9% and 22.3%, respectively, for its customized benchmark and 68.0% and 12.1%, respectively, for the S&P 500 as of 4/30/25.

SAM’s Energy Transition Portfolio generated a return (net of fees) of 11.4% and 7.5% for the periods since 4/29/21 inception and 1-year, respectively. This compares to a total return of 21.6% and 10.1%, respectively, for its customized benchmark and 40.5% and 12.1%, respectively, for the S&P 500 as of 4/30/25.

2025 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 ~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.