Oil and natural gas companies are likely to get a boost by President-elect Donald Trump’s policies, but experts are bullish more from the sector’s fundamentals than the new administration.
After campaigning on promises of liberalizing oil and gas leasing on federal lands, Trump has been stacking his Cabinet with people friendly to the industry.
His pick for Secretary of State is Rex Tillerson, CEO of Exxon Mobil Corp. (ticker: XOM), while he has tapped Oklahoma Attorney General Scott Pruitt to head the Environmental Protection Agency, former Texas Gov. Rick Perry as energy secretary and Montana Rep. Ryan Zinke as secretary of the interior, according to media reports.
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“This is probably the most energy-friendly administration since World War II,” says Jay Hatfield, president of Infrastructure Capital Advisors and portfolio manager of the energy infrastructure InfraCap MLP exchange-traded fund (AMZA). “It means the end of the war on fossil fuels that was under way under the Obama administration and that was likely to be continued under a Clinton administration.”
Of course, environmental groups have been wringing their hands during the Cabinet selection process. After Tillerson was nominated, the Sierra Club says that “Trump’s Cabinet represents a who’s who of climate-deniers and fossil fuel hacks.” The Environmental Defense Fund asks, “Where are the voices in this administration to counter the influence of oil executives and allies?” And the League of Conservation Voters says: “It’s clearer than ever that Donald Trump is hoping to install the most anti-environmental Cabinet in our nation’s history.”
Those who want to see less regulation on oil and gas companies have found a friend in Trump.
Tom McNulty, a director with Navigant Consulting, expects easing of restrictions and the potential for more production of oil and gas in the U.S., more natural gas used for power and more natural gas and oil exports.
Hatfield expects the embattled Dakota Access Pipeline – a project run by Energy Transfer Partners (ETP), on whose board Perry sits, that has faced protests from environmental and Native American groups – and potential progress on the controversial Keystone XL pipeline project, owned by TransCanada Corp. (TRP).
Trump’s election comes as oil and gas stocks have already been getting support from a bounce in prices, so the new backing from Trump is like icing on the cake.
“We were already in the very late innings of this bear market,” says Brad Lamensdorf, founder of Active Alts. “This is going to throw fuel on the fire.”
Amid the help from a Trump administration friendly to fossil fuels, the fundamentals of the industry will be its main driver, Hatfield says.
Next year, he expects oil prices will rise to $60 to $70 a barrel from around $50 now, spurring production. Over the next five years, Hatfield forecasts U.S. production will increase by more than 5 million barrels.
But that’s not likely to drive prices lower because higher-cost offshore and tar sands production will be reduced, he says. At the same time, global demand will slowly increase, helped by a growing middle class in emerging markets, he says. Additionally, the OPEC’s recent decision to cut output will help, he says.
McNulty notes that the overall downturn in prices since oil dropped from more than $100 a barrel in 2014 has helped spark more efficient production and weed out underperforming companies. As a result, companies that can operate profitably at the current price of oil are particularly poised to benefit when prices rise.
Lamensdorf is bullish because companies haven’t been spending as much on exploration and development, which he believes will crimp supply of oil and gas through 2018.
Additionally, natural gas exports as well as Trump’s push to ramp up manufacturing will boost demand for the commodity, he says.
Exporting natural gas into the international market is “a glut solver,” Lamensdorf says.
He likes Chesapeake Energy Corp. (CHK), Denbury Resources (DNR) and Whiting Petroleum Corp. (WLL), saying these companies have good assets, are regrouping after the bear market and now offer good bargain hunting opportunities.
Hatfield likes companies that own pipelines, particularly Williams Partners (WPZ), which owns the biggest natural gas pipeline system in the United States. He sees less of a threat from regulators to expansion of that pipeline under the new administration, and he thinks Williams is undervalued.
Hatfield also points to Energy Transfer Partners. After its merger with Sunoco Logistics Partners (SXL) closes, he thinks ETP’s shares will rise. And he says ETP has also been overly penalized by the Dakota pipeline controversy.