QQQ - Global Energy Offers Changing Investment Theses (Video)

2023-09-14 14:52:43 ET

Summary

• Attention to oil market supply tightness due to OPEC-plus production cuts and the knock-on effects of central banks raising rates are two drivers in energy fundamentals.
• Global demand is expected to rise 15% by 2050, with developing nations adding more to energy demand than what developed countries reduce.
• The U.S. has become the world's largest LNG exporter, overtaking Qatar and Australia, and renewables and natural gas grow in new power generation capacity.
• The oil and gas industry is offering stable investment returns, alongside infrastructure plays as well.

In the last few days, more attention has been focused on oil market supply tightness, owing to the OPEC-plus production cuts. This supply tightness was coming and known. Additionally, another real variable was whether the U.S. would have a soft landing, but also how the rest of the world was faring with the knock-on effects of central banks raising rates. The pandemic is still causing economic and strategic resets, economically and geopolitically. In the following video, Seeking Alpha editor Michael Hopkins and I parse what is happening in energy, the macro environment and what are options to play a hard-to-predict and shifting energy mix.

Video: Global Energy and Capital Markets Talk: Many Forces and Reality

A set-up to this discussion is the following:

• Global demand is expected to rise 15% by 2050 as developing nations add five times what is reduced by developed countries. Per Exxon ( XOM ). [i]

• About 65% of this growth is in Africa and the Middle East, more than 25% in Asia Pacific, and roughly 3% in developed countries.

• We add roughly 2 billion people to 2050.

In the U.S., renewables have comprised a larger proportion of power generation capacity additions. In 2022 though, natural gas grew in a relative sense. Importantly, it's the rest of the world where the natural gas action is.

The rest of the world wants and demands U.S. LNG, largely owing to Russia's invasion of Ukraine.

In 1H22, within just six years after becoming the net exporter of gas, the US overtook Qatar and Australia as the world's largest LNG exporter. Mar 9, 2023[i].

Aside from an interplay between the energy sector ( XLE ) and tech ( QQQ ), total returns in both producers and midstream have fared well in the last year. Given the forecasts ahead, their continued steady returns have room to run.

Interestingly, a graphic below shows the market cap growth of green energy and oil and gas majors which reveals some information, but not the complete story. These and other stocks are discussed further in the video.

A look at performance of the constituents noted above paints a different picture of late, as the market starts to decide where trends are heading.

Also in the spotlight has been talk about the European Central Bank raising interest rates, which in fact happened today. There's still excess heat in the largest European bloc countries of Germany and France, which can have different effects for the others, I have read. From the Wall Street Journal today:

New economic forecasts published by the ECB Thursday suggested that eurozone growth will slow significantly more than previously expected this year and next, and that inflation will remain markedly above the ECB's target of 2% through next year. In particular, the bank raised its forecast for inflation next year from 3% to 3.2%, mainly to reflect "a higher path for energy prices."

Aside from the impact of the Russian invasion which has required countries to re-direct their energy supply chains, green energy policies have been softened to include natural gas and nuclear energy as requirements for an energy transition. (This is an extreme simplification of the years of working out the optimal policy mix). The U.S. IRA legislation continues to incentivize growth in various decarbonization efforts but also potentially confuse the market as to what's ultimately economic - and investment-worthy.

I've covered the state of carbon capture fairly extensively in two recent videos as well. The market is nascent, fragmented and finding its way forward. Many firms wish to develop a successful industry, including Exxon ((XOM)), Chevron (CVX), and others. As mentioned before in interviews, the case for enhanced oil recovery is quite strong, as reflected in Exxon's purchase of Denbury (DEN). That's a path forward to more efficiently produce oil that's in great demand at present and in the foreseeable future.

Increasingly, more nuanced approaches and investment opportunities are emerging to play in the energy space. The bottom line: The case for oil and gas, plus green energy plays that are embedded in bellwether stocks or firms makes sense. And definitely, outliers exist that can become central parts of an innovative and regenerating energy mix.

[i] Global energy fundamentals | ExxonMobil's Global Outlook

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