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Monthly Commentary from Dan Pickering

Energy was flat/mixed during April. Diversified Energy eked out +0.3% (S&P1500 Energy, S15ENRS) compared to a strong +5.2% for the broad market (S&P500, SPX). Energy subsectors were mixed with Midstream again leading the pack at +6.2% (AMZ), while E&P fell -1.4% (XOP) and Oilfield Services dropped -4.5% (OIH). Front month WTI crude popped +7.5% (~$63.60/bbl) and front month Henry Hub natural gas soared +12.4% (~$2.93/mcf).

During each month, we write down notable events to make sure they aren’t forgotten when this monthly writeup is created. April didn’t gather much ink, although one data point was particularly notable. Saudi Arabia and OPEC indicated the staged return of 2mmbbls/day, which oil markets absorbed quite well. Front month WTI traded in a ~10% band ($58.65/bbl -$65/bbl), finishing the month toward the high. Natural gas also made a strong move on favorable inventories and high exports. Copper also hit new highs, and other commodities were gangbusters. For those that think there is no inflation, we beg to differ. Commodity tightness is more than just an economic rebound trade –some structural supply tightness also crept into many markets during the past year.

Major oil companies and US E&P’s delivered capital discipline actions and commentary during Q1 earnings reporting season. Budgets are constrained and restrained. Even growth-minded EOG Resources got on the Value Over Volume train, delivering a $1/share special dividend and indicating they “might not grow at all next year” if the macro dictates. This is the mindset that is needed for a sustained oil recovery. This type of recovery is far from baked into NYMEX oil futures. Long-dated 2025 WTI has moved from ~$49-51/bbl range to the $53-$55 range (closing May 14th at ~$53.40/bbl). When 2025 WTI trades over $60/bbl (and we expect it will), the industry will have notably better profitability and (hopefully) more respect from the investment community.

For the past 3+ years (maybe even 5+ years), our primary commentary on US natural gas has been “too much supply” or “too easy to add supply.” Our portfolio has generally been devoid of natural gas companies. However, there are now several dynamics worth adding to the discussion. There are emerging signs that core inventory is depleting (evidenced by deteriorating type curves for recent well vintages). Also, consolidation continues. In early May, Equitable Resources (EQT) spent almost $3 billion to acquire fellow Appalachian player Alta Resources. This is a good thing for EQT and for the industry. We’re not there yet, but the trend of fewer, bigger players bodes well for disciplined supply and better average prices. We’re also seeing the emergence of Responsibly Sourced Gas (RSG) and Renewable Natural Gas (RNG). RSG is natural gas produced from sites certified/verified as having the “highest standards and practices in all phases of operations.” RNG comes from landfills or natural sources (animal methane) and is captured through various processes. RNG and RSG trade at premium prices (and most importantly, premium margins) to regular-way natural gas. It seems like producing responsibly (and thus earning an RSG designation) will eventually become table stakes for gas production. In the meantime, we’re paying closer attention to gassy players.

On the energy transition front, capital continues to amass. BlackRock and Temasek committed $600MM as they formed Decarbonization Partners to invest in companies and proven technologies that will reduce and potentially eliminate carbon emissions. Baker Hughes, Plug Power and Chart Industries became cornerstone investors in FiveT Hydrogen, committing $320MM to the clean-hydrogen-only private infrastructure fund, which has ambitions to raise $1B. Energy Transition Ventures announced its intention to raise $75MM for venture capital investments deployed exclusively in energy transition technologies. Decarbonization has massive momentum via individuals, corporates, institutions and governments. Analogies to the US shale boom are appropriate, although energy transition activities will be many, many multiples larger than shale. Valuations are high, technologies are new, roadmaps are unclear and it will take the next decade to sort things out. We expect energy transition fortunes to be made and lost across equity, private equity, debt, project finance, tax credits and derivatives. Grab some popcorn and pull up a chair.
Traditional energy stocks remain the best sector in the market YTD. We suspect they’ll finish the year in the same position and higher on an absolute basis. Inflation fears are creating jitters in the market. This will push more and more investors to consider energy and natural resource companies as a hedge. Despite the strong YTD performance, energy stocks are not expensive, discounting only low $50’s long-term WTI oil. With the wind finally at its back after 5+ dismal years, the sector has several good years ahead.

As always, we welcome your questions and appreciate your interest.