Oct 02, 2020 (Baystreet.ca via COMTEX) -- The battle lines are already drawn in a high-stakes political contest that will ostensibly determine the fate of the American energy sector.
In the blue corner is former VP Joe Biden, who has not only pledged to steer the United States to net-zero carbon emissions status by 2050 but is also hell-bent on stopping key oil and gas projects on federal lands and waters, including the controversial Keystone XL.
In the red corner is President Trump, who has taken credit for the spectacular surge in U.S. shale oil production, rolled back a raft of regulations in the fossil fuel sector, and sworn to continue doing so if re-elected.
They say it's best to leave your politics at the door when investing. That maxim certainly rings true for presidential elections since it's a well-established fact that presidential policies tend to matter a lot less for the stock market than Federal Reserve policies or even the general health of the economy.
Still, energy is one of the key sectors whose fate might look radically different under a Democratic administration compared to a Republican one.
The dynamics in the oil and gas sector have, in the past, determined the outcomes of U.S. presidential elections, which in this case appear to favor Trump courtesy of prevailing low gas prices.
On the other hand, as of late September, betting markets have priced in a 59% probability of former Democrat frontrunner Joe Biden taking the Oval Office. That's a sharp turnaround from April and May when Trump held an 8-point lead, and as recently as June when it was a dead heat. Further, according to most national polls, Biden has a roughly 9% lead, but Biden's lead in the six battleground states that really matter in this election--Arizona, Florida, Michigan, North Carolina, Pennsylvania and Wisconsin--remains a toss-up with less than a 4% lead--barely outside of the margin of error.
Put simply, this race is far from over.
Bearing this in mind, Chase Robertson, Managing Partner of Houston-based RIA Robertson Wealth Management, has some valuable words for investors:
"We're advising our clients to be cautiously optimistic going into the election. We're hedging our bets, raising a little cash and spreading our positions across sectors we think will do well regardless of who takes the White House."
That said, prospective winners under a Biden administration are a very different breed from the mix that is likely to shine if Trump gets a second term in office.
Here are the probable winning energy stocks and ETFs under the two protagonists.
Let's just start by flat out saying that the prognosis is not great for the fossil fuel industry, even under Trump.
According to a report by the Rapidan Energy Group, the U.S. energy industry is likely to bounce back faster under Trump than Biden.; however, even Trump will be powerless to help the industry in a weak macro environment.
Rapidan says that U.S. onshore oil production is likely to clock in at 1 million barrels per day lower by 2023 if Joe Biden trounces Donald Trump in the November elections. However, the advantage would be almost negligible if the oil markets are only able to put up a weak recovery.
Rapidan has a base case of Brent crude prices rebounding to the low $50s/b in 2023 while oil demand rises to around 10 million b/d over the timeframe. On the global stage, Rapidan's base case has oil production rising courtesy of returning OPEC+ production, a rebound by Canadian oil sands, and a startup of seven floating production units in Brazil.
Rapidan, however, sees Brent plateauing in the mid-$40s/b by 2023 with global crude demand climbing only 7.3 million b/d over the timeframe. Meanwhile, U.S. shale production would come in a good 1 million b/d below the base case in 2021.
Not surprisingly, Rapidan says the tables are likely to turn for Iran if Biden wins with the Middle East nation expected to export 1.8 million b/d just a year after Biden ascends to the Oval Office but might not be allowed to pump that much until the second half of 2022 under Trump.
The Rapidan report is, clearly, very bearish for U.S. shale, either way.
The base case--which is the bullish scenario-- has predicted that the U.S. shale industry will be unable to fully recover to pre-crisis production levels over the next three years, even under President Trump. The projected Brent crude of low $50s/b by 2023 suggests that most shale firms are doomed to remain in the red.
The U.S. shale industry is already in dire straits, with hundreds of operators still staring at an uncertain future. WTI prices have been range-bound at $38-43/barrel since June, with the with the current WTI price of $39.80 still a long way off the ~$50/barrel that many shale producers require to turn a profit.
But that does not mean that it will be all doom and gloom for oil bulls if Trump wins a second term in office.
A Trump administration might not be able to reverse the trends driving energy prices, something that's likely beyond the power of any president. But it is likely to be less hostile to the sector, including a lower likelihood of slapping it with new taxes or regulation.
Here are some likely energy winners under Trump.
#1. Energy Select Sector SPDR Fund
The U.S. and global energy sectors have been in the doghouse for years, and it just keeps getting worse. America's shale frackers were a little too good at their jobs, and the Covid-19 situation has only served to make a bad situation a lot worse.
Although this a short- to mid-term catalyst that is likely to eventually pass, the green energy renaissance has almost made it certain that traditional fossil fuels may never fully regain their pre-crisis dominance.
Still, there's a case to be made that the U.S. oil and gas benchmark, the Energy Select Sector SPDR Fund (XLE), might be oversold at this point.
Down by 49.4% in the year-to-date, XLE now boasts a dividend yield of 13.14%, way better than the 8.17% yield by the country's 246 US Real Estate Investment Trusts (REITs) and only rivaled by Master Limited Partnerships (MLPs), some of which yield north of 20%.
In short, XLE is quite likely to become a magnet for yield-chasing investors once oil demand starts to show concrete signs of recovery.
However, that might not happen any time soon, with many analysts foreseeing a substantial global oil demand recovery coming in no less than 3-4 quarters due to the second wave of Covid-19 infections.
#2. Exxon Mobil
Even in an industrywide selloff, there comes a point when a stock becomes too cheap to ignore, especially when it's a solid company backed by strong fundamentals.