Finally, a rebound month for energy.  During November, the S&P500 gained +5.9%, the Nasdaq rallied +6.3% and conventional energy outperformed as Diversified Energy added +7.8% (S&P 1500 Energy, S15ENRS), with other energy subsector performance: Midstream +14.5% (AMZ), Upstream +11.3% (XOP), Oilfield Services+10.5% (OIH) and Clean Energy −5.4% (ICLN). November saw front month WTI fall -1.8% (~$68/bbl), while Henry Hub natural gas remained wildly volatile at +24.2% (to ~$3.35/mmbtu).⁽¹⁾  

Macro themes have dominated since the end of October.

The US election results were a surprise – it wasn’t that Trump won (which polls indicated was a 50/50 probability), but that he won convincingly.  With seemingly enthusiastic endorsement from the American people and control of both the House and the Senate, “the Donald” influenced Wall Street and energy more than we expected.  Conventional energy stocks quickly rallied +3-8% on the thesis of a supportive political climate, while clean energy stocks were smashed on the view that IRA subsidies would be diminished.  Speculation around Trump administration geopolitical implications also went into high gear.  Russia/Ukraine peace?  Iranian sanctions? Tariffs?  

With the dust having settled somewhat since election day, we see glimmers of information, but must realistically wait a few months to see where energy policy and energy issues actually rank for the Trump administration.  

• The announcement of Chris Wright, CEO of Liberty Energy, as the choice for Energy Secretary is encouraging. We’ve known Chris for a long time and see him as a measured, thoughtful and fair person.  He certainly loves what conventional energy provides for the standard of living for the planet, but is also not a climate-hater.  Assuming he is confirmed, we should expect energy-friendly policies to be advanced.  How Mr. Wright will fare in the political morass of Washington DC remains to be seen. We are hopeful.
• The incoming Trump administration’s idea of a National Energy Council (NEC), overseen by Department of Interior-elect Doug Burgum, is also encouraging.  As governor of North Dakota, Burgum is familiar with oil and gas issues, as well as carbon sequestration, wind and solar and has been deemed an advocate of “all-of-the-above” for energy.   In theory, the NEC will include federal departments and agencies involved with permitting, regulating, producing, generating, distributing and transporting energy (yes, that was a cut-and-paste from press articles).  Currently short on specifics, we wonder if the NEC will work top-down or bottoms-up. Will the organization take issues that originate in various agencies and work to advance them in a collaborative manner? Or will the organization comprehensively develop priorities and push them down into the various agencies to do the blocking-and-tackling?
• President-elect Trump has spoken passionately about lowering the cost of energy.  Drill, baby, drill has been a catchphrase of this concept. We are extremely skeptical of any sort of politically-inspired increase in US oil and gas drilling activity.  But we do admit to wondering what other levers might get pulled by the Administration.
• Switching to the other side of the energy equation – clean energy initiatives appear likely to receive less support for the next four years.  Incentives for electric vehicles are at risk, while we wait on clarity regarding various other tax credits (45Q,45V, etc.)  We suspect fewer cuts than many believe on the theory that it is politically hard to take things away.

Taking everything we know right now, we stick to our original thesis that the Trump administration will make it easier for the oilpatch to do business and tougher for clean energy economics.  For the first time in years, there is a tailwind around the perception of the oil and gas sector.  It feels encouraged by the government, rather than being attacked. Whether this can translate to increased interest in energy stocks or expanded multiples is dependent on whether the commodity price can hold at these levels amid barely balanced supply/demand fundamentals.

Looking out to 2025, we agree with consensus, it is a nail-biter for oil markets.  The IEA currently forecasts +1.9mmbopd of supply growth against +1.1mmbopd of demand growth.  If they are correct, get ready for $50/bbl oil.  We see a more balanced supply/demand outlook, albeit skewed slightly to oversupply with increases coming from Guyana, Brazil, Argentina, Canada and others (including the US).  As such:

• We are forecasting $65-$75/bbl oil for 2025, with no return of OPEC+ barrels.
• Given the sloppy supply/demand outlook, the distribution of possible outcomes skews more toward softer prices than stronger prices.  Any event that drives price higher will be eagerly met with OPEC+ barrels, while it will take notably lower prices to change E&P spending and/or producing behavior.  
• If OPEC+ insists on returning production, 2025 oil price will be materially lower.  Price will need to push out non-OPEC production and that won’t occur until oil is somewhere in the $50/bbl area (or lower).
• All eyes on OPEC+. There is simply no room/demand for their incremental barrels for the foreseeable future.  Will the cartel continue to support price at the expense of market share?  Or take the 2014 route and punish the markets by adding supply?  We believe the former, but awake every morning worried about the latter.
• Geopolitical dynamics will matter.  Any action to more-aggressively sanction Iran will generate room for incremental OPEC+/Saudi barrels to return (overall, a good thing for oil markets).  Any peaceful conclusion to the Russia/Ukraine conflict likely generates a knee-jerk downside oil price selloff on fears of additional Russian supply.  We see supply concerns as much more justified for Russian gas (significant volumes curtailed by the war) than Russian oil (very little curtailed by the war).

During November, the energy M&A market came back to life after a pre-election hiatus.  Coterra (CTRA) bought Permian-focused private companies Franklin Mountain and Avant for almost $4B, while Ovintiv bought $2.4B of Canadian shale assets while selling $2B of Uinta assets.  The coal space saw a big deal as Peabody bought Anglo American’s Australian coal mines for $2.3B plus a $1B+ earnout.  In midstream, ONEOK inked a $4B+ deal to acquire the remainder of EnLink (initial acquisition was earlier this year).  Looking ahead, a Trump FTC should be conducive to further consolidation, as are the ongoing drivers of Size, Scale and Value.  Until investors start paying up for energy companies, the industry will consume itself via share repurchases and consolidation.

Let’s recap energy stocks in 2024. Energy companies were capital disciplined, generated free cash and bought back stock, while trading at depressed multiples vs. 10-year averages. Through the end of November 2024, only the midstream sector outperformed the S&P500 YTD (AMZ total return +33.7% vs. S&P500 +28.1%).  Everything else has lagged dramatically despite shareholder friendly attitudes and actions (Diversified Energy +16.7%, Majors +2.9%, Upstream +8.1%, oilfield service -2.0%, clean energy -19.9%).  We sympathize with frustrated energy executives.  The sector is delivering everything investors have asked for…and has still received no respect.

For energy stocks, 2025 runs the risk of the same outcome as 2024.  Money will flow to the energy sector as/when the tech sector loses luster, commodity prices make a move higher relative to expectations and/or supply overhangs like OPEC+ start to diminish.  With little visibility or probability of any of these outcomes, 2025 is an energy stockpicking game, not an energy beta story.

(1) Bloomberg