Traditional Energy Monthly Commentary

Unpretty.  While the S&P500 and Nasdaq gained +2.1% and +2.8%, respectively, energy slumped.  Diversified Energy fell -2.9% (S&P 1500 Energy, S15ENRS) with subsector performance as follows: Midstream -0.3% (AMZ), Oilfield Services -5.0% (OIH), Upstream -5.1% (XOP) and Clean Energy +2.8% (ICLN).  During September, front month WTI tanked -7.3% (~$68.20/bbl), while front month NYMEX natural gas soared +37.4% (~$2.90/mmbtu).⁽¹⁾ 
 
Things are complicated in the oil and gas world these days.  September saw the highest ever level of short positioning in Brent crude as financial players expressed concern over 2025 supply and demand fundamentals. Timely indeed as the FT’s September 26th article reported that Saudi Arabia was potentially interested in retaking market share.  WTI bottomed around $65/bbl, before the dual catalysts of China stimulus and Iranian missile strikes on Israel took it back to the mid-$70’s.
 
Our observations:

• The overall reaction to Saudi’s messaging was surprisingly muted.  Typically, this type of news flow would generate countless pages of press and analyst commentary. Not this time.  Almost eerily quiet.
• We believe the Saudi message is more likely to its cheating OPEC+ comrades rather than non-OPEC players.
• If Saudi is trying to rekindle a fight with US shale (we don’t think they are), they are facing a much stronger adversary than they did in November 2014.  US producers have rock-solid balance sheets, lower well costs, lower decline rates and slower growth targets.  Any OPEC+/Saudi punch aimed at US shale likely results in a painful boomerang.
• We believe there is absolutely no room in global oil markets for incremental OPEC+ barrels in Q4 2024…and very little room in 2025.  OPEC can return barrels and face $50’s oil.  Or keep oil off the market and enjoy $70’s.  We expect the latter.
• While geopolitical analysis is not our specialty, it does appear that Saudi’s commentary provides air cover for increased supply if it is needed to offset shortfalls from Iran (whether from sanctions, violence or otherwise). 
• Purely from a price perspective, crude’s rally off the bottom was measly.  China stimulating AND escalating Middle East fighting AND crude traders caught short - oil should have rallied more.  Despite the rally, it feels like the oil bears remain in control.  

With the approach of winter, natural gas popped in September, briefly touching~$3/mmbtu.  Winter weather will be the defining variable of the next five months, with LNG driving the next five years.  Unlike the past few years, it now feels like the gas story is becoming easier to own than the oil story. 

During September, Chesapeake and Southwestern closed their transaction, renaming the company Expand Energy.  The Chevron-Hess deal cleared the FTC with no required operational tweaks. However, for the first month in the past twenty, there were no notable energy M&A announcements.  Unless oil tanks to the low $60’s, this is a pause, not the end of the consolidation trend.  

The stock market dismissed energy during September, with all conventional energy subsectors falling as the broad market rallied.  Underneath the surface, there were some signs energy isn’t completely DOA.  A $2.2B block of Diamondback Energy traded overnight - big dollars at a low discount. Encouraging.  Gassy Barnett player BKV completed an IPO. Although it came below the indicated range, the stock found a home. More recently, Exxon Mobil stock traded at an all-time high.  We suspect underexposed institutional investors added this big, liquid stock just in case the Iran situation gets worse.  

October will bring Q3 earnings reports.  We suspect tech earnings will be good enough to maintain that sector’s stranglehold on investor mindshare. Energy will benefit from any tech stumbles, but we aren’t holding our breath.  Which makes stock picking paramount.  One of our good friends in the asset management business, a generalist portfolio manager, characterized investing in energy as “too hard”.  It is always hard…but the upside reward remains meaningful.  Keep it on the radar screen!

Decarbonization / Energy Transition Quarterly Commentary

Choppy with signs of bottoming.  Q3 saw the iShares Global Clean Energy ETF (ICLN) gain +10.3%, outperforming the S&P500 (+5.9%), the Nasdaq Composite (+2.8%) and conventional energy (−3.0%, S&P1500 Energy, S15ENRS).⁽¹⁾ 
 
Notable Q3 items:

• Double whammy potential in a good way…lower interest rates and Chinese stimulus – If higher interest rates and a slowing Chinese economy were negative for the clean energy sector, the converse should also be true.  The craziness of ESG + SPACs + decarbonization frenzy + very low interest rates is unquestionably a thing of the past.  Nonetheless, directionally lower rates should help boost the value of the decarbonization sector, where much of the hockey-stick cash flows occur in the late 2020’s/2030’s.  Chinese stimulus may or may not be the hoped-for economic catalyst, but it is certainly a positive on the margin.  Although not a guarantee to turn clean energy stocks from underperformers to outperformers, every little     bit helps.   
• SPWR goes broke – In a reminder that all businesses have cycles, solar equipment provider SunPower (SPWR) went bankrupt during September.  As interest rates rose, the cost of financing residential solar installations also rose, resulting in declining demand for solar equipment.  Simultaneously, solar equipment manufacturers were caught with excess inventory, creating a downward pricing spiral.  Other equipment providers will also be forced to restructure, while the companies that make it through the downturn will gain market share.  Even in a booming sector, cycles matter!
• The election and energy transition? –  With the US election approaching, thoughts turn to the potential outcomes.  A win for Harris is likely to result in status quo for the decarbonization sector.  And likely a relief rally for decarbonization equities.  A Trump victory has more nuanced implications.  Trump has threatened to repeal the IRA, yet has voiced support of solar.  Carbon capture appears to have bipartisan support.  Onshoring/US manufacturing is a Trump position but is also supported by IRA tax credits.  Tariffs (which would support US EV makers) appear fait accompli with Trump.  We suspect a Trump victory will hurt overall decarbonization stocks in the short run, but are taking a “watch what they do, not what they say” approach. It will be an interesting November.
• Electric vehicles lose momentum – We believe EV’s are indeed the future of transportation, but have been skeptical and vocal on the pace of adoption.  To that end - Tesla Q2 deliveries missed expectations, Rivian has supply chain issues, Volvo moved back its 2030 100% EV sales timing, GM abandoned its 1MM 2025 EV sales goal and Ford took a $1.9B EV-related charge as it moved EV capex from 40% to 30% and shifted some California EV production back to conventional ICE vehicles.  The market’s love affair with the concept of electric vehicles has eroded and valuations are compressing – from astronomical to high.  We think this will continue, even as EVs move toward mainstream adoption. 
• Lithium groping around a bottom – Lithium prices are down ~90% from 2022 highs.  At current prices, many projects have been put on hold and the profitability of existing projects is marginal.  We’ve seen this countless times in other commodity markets, most recently with US natural gas.  Oversupply drives price down to cash cost, resulting in short and long-term adjustments to supply.  In lithium, battery-maker CATL announced in September the closure of its big Jiangxi lepidolite mine, helping lithium pricing and sentiment to bottom.  At the same time, another bottoming indicator, consolidation, has begun in the lithium sector.  In early October, mining giant Rio Tinto announced the $6.7B acquisition of Arcadium Lithium for a 70%+ premium.  Deals like this help make a bottom and we are constructive on the sector (which means cautiously and slowly adding exposure). 
• Nuclear renaissance ongoing – AI data centers need significant amounts of power.  Hyperscalers like Amazon, Google, Microsoft, Meta, etc. would prefer this power be low/zero carbon.  To achieve both objectives, we’ve recently seen a surge in long-term deals for nuclear power.  These include restarts of shuttered facilities (Microsoft/Three Mile Island) and partnership announcements with small modular reactor (SMR) companies (Google and Amazon).  We applaud the long-term thinking, but must inject a dose of reality.  Many of these deals are better on paper than they are at an electrical substation.  Repowering nukes is practical and relatively quick.  However, SMR technology is still nascent, with 2030+ time frames for delivering power.   
• Not all clean energy ETFs are created the same – In these quarterly writeups, we often quote the performance of two clean energy ETFs.  The Invesco WilderHill Clean Energy ETF (symbol PBW) is down 31% in 2024 through the end of Q3. In the same time period, the iShares Global Clean Energy ETF (symbol ICLN) is down only 5%.  Within the clean energy sector, performance is quite disparate.  ICLN is more international, larger cap-focused and has significant exposures in solar, utilities and equipment businesses.  PBW is more domestic, owns more small cap companies and is heavy in lithium, energy storage, and EV-related businesses. Stock selection matters.   

As stated in every quarterly commentary since the inception of the Fund, our thematic TE&M (Technology, Energy & Mobility) views are driven by the combination of supply/demand dynamics, the status of technology development and stock/sector valuation.  Q3 saw continued crosscurrents but some encouraging signs of troughing.  This more constructive outlook is reflected in our slowly increasing net long bias. 
 
Currently, we see the following subsectors as interesting on the long side: energy storage, carbon capture, enabling commodities, decarbonization equipment and services, wind/solar and special situations.  On the avoid/short side: electric vehicle industry, hydrogen. These are unchanged over the past nine months.  

(1) Bloomberg