November 12, 2020
Every four years, as the US election rolls around, investors face the uphill task of interpreting the shifting political sands and how they might affect their portfolios. Here, Newton analyst Laura Sheehan considers the question of how Joe Biden’s election win might now change the outlook for the energy sector.
In 2017, not long after he entered the White House, Donald Trump declared his grand ambition: to make the US self-sufficient in energy. The aim, he said, was to “become, and stay, totally independent of any need to import energy from the OPEC1 cartel or any nations hostile to our interests".
In short shrift the President enacted a raft of changes linked to these ambitions: loosening drilling restrictions on Federal lands and parks, increasing support for pipeline infrastructure, downplaying the risks of climate change, and undoing Obama-era regulations on emissions from coal power plants, automobiles and oil and gas wells.
Now, with the election of Democrat Joe Biden as President, the door is open for a U-turn in these policies as the US pursues a more open, multi-lateral agenda.
For Laura Sheehan, energy analyst with Newton, this change of direction could be an abrupt one as government policy aligns with a gathering global consensus in favor of environmental concerns.
“On climate, the Democrats are unlikely to run against the tide and instead will embark on an aggressive push towards decarbonization” she says. “Depending on how pliant the Senate will be, restrictions on new oil drilling on Federal land, in the Gulf of Mexico and in the Arctic Alaska could well be re-enacted. Progress on building the controversial Keystone XL pipeline could also be stopped in its tracks. Emissions – whether from automobiles or by energy companies – will once again come under the spotlight. These are seen to be key to decarbonizing transportation as electric vehicle penetration grows.”
For companies which have benefited from US energy policy under Trump, the election of Joe Biden is seen as a negative – but even here, this will have less impact than in any ordinary year, given the glut in oil, gas and coal supply, the collapse in demand and the consequent declines in energy company share prices witnessed through 2020.
One standout casualty, however, is likely to be the coal industry, says Sheehan. Despite all the sound and fury around Trump’s pledge to “make coal great again” over the four years to November 2020, in the cold light of day, efforts to put fossil fuel front and center of US energy policy amounted to little more than a series of soundbites. As of Q3 2020, for instance, shares in the country’s largest coal producers were well below their immediate highs following Donald Trump’s 2016 election. The third and fourth largest producers remain in bankruptcy.2 From generating more than half of America’s electricity 10 years ago, coal now accounts for around one fifth – and that level is falling. Even amid a Trump-mandated push for fossil fuels, the fastest-growing electricity source was wind.3
Partly, says Sheehan, coal’s collapse is the consequence of market forces: an overabundance of supply coupled with its replacement by cleaner, cheaper gas and the slump in demand due to Covid-19. But it also talks to the relative impotence of any sitting president when it comes to enacting lasting change on domestic policy – particularly if that change runs counter to the prevailing mood music.
“The most you can say about Trump and energy is that his actions had an impact at the margin,” says Sheehan. “They likely helped support general positive sentiment towards investment while giving CEOs an excuse to ignore important questions on their environmental actions, such as flaring and methane leakage.”
As in so many spheres of life, she says, it’s market forces that win out– and that’s also likely to be the case under a Biden presidency. Here, she highlights how the investment community is becoming more environmentally conscious, more alive to transition risks associated with climate change and more likely to push for sustainable investments away from polluting companies. In that sense, CO2 producers in the energy sector will likely experience headwinds regardless but should a Biden administration succeed at introducing more environmental policy, these trends could accelerate.
The same goes for companies in the energy sector with the smaller pure-play exploration and production companies most likely to face headwinds, says Sheehan: “Especially the smaller cap ones which are more exposed to risks around activity restrictions and with greater Federal land exposure. Similarly this hurts US services names, particularly domestically focused ones, while refiners would have a higher cost of oil, alongside potential charges for their emissions and peak demand looming sooner (particularly for gasoline). This isn’t universally negative however as further restrictions on investments, be that political or market forces, could lead to higher prices going forward. The bigger upstream names, including the majors, are more diversified either in the US or internationally, so, again, this could lead to further consolidation, which would be a good thing for the industry,” she concludes.
1 The Organization of Petroleum-Exporting Countries, an intergovernmental organization of 13 nations accounting for an estimated 44% of global oil production.
2 The Washington Post: ‘Trump pledged to bring back coal. Like everything under him, it collapsed instead’, 12 June 2020
All investments involve some level of risk, including loss of principal. Certain investments have specific or unique risks. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.
Recent market risks include pandemic risks related to COVID-19. The effects of COVID-19 have contributed to increased volatility in global markets and will likely affect certain countries, companies, industries and market sectors more dramatically than others.
Views expressed are those of the author stated and do not reflect views of other managers or the firm overall. Views are current as of the date of this publication and subject to change. This information contains projections or other forward-looking statements regarding future events, targets or expectations, and is only current as of the date indicated. There is no assurance that such events or expectations will be achieved, and actual results may be significantly different from that shown here. The information is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Please consult a legal, tax or financial professional in order to determine whether an investment product or service is appropriate for a particular situation.
"Newton" and/or the "Newton Investment Management" brand refers to Newton Investment Management Limited. Newton is incorporated in the United Kingdom (Registered in England no. 1371973) and is authorized and regulated by the Financial Conduct Authority in the conduct of investment business. Newton is a subsidiary of The Bank of New York Mellon Corporation. Newton is registered with the SEC in the United States of America as an investment adviser under the Investment Advisers Act of 1940. Newton's investment business is described in Form ADV, Part 1 and 2, which can be obtained from the SEC.gov website or obtained upon request.
BNY Mellon Investment Management is one of the world’s leading investment management organizations and one of the top U.S. wealth managers, encompassing BNY Mellon’s affiliated investment management firms, wealth management organization and global distribution companies. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may also be used as a generic term to reference the Corporation as a whole or its various subsidiaries generally.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. BNY Mellon Securities Corporation is a subsidiary of BNY Mellon.
© 2020 BNY Mellon Securities Corporation, distributor, 240 Greenwich Street, 9th Floor, New York NY, 10286