One of the expectations for the second term of president-elect Donald Trump is that “dirty” energy will see a huge revival due to pushing back the strict ESG policies of the current administration. Less wind and solar and back to more oil, gas and coal, maybe with nuclear mixed in. However, despite the perception being that Trump is good for oil and gas producers, the above would be exactly the opposite as more supply means lower energy prices. Will we see aggressive drilling and lower energy prices or shall we prepare for something entirely different? All my members receive my latest stock idea, my second “Trump Trade” which should be a big beneficiary either way.

Summary and key takeaways from today’s Weekly
– I am discussing Trump’s “drill, baby, drill” promise from different angles.
– The results are first that one should expect something unexpected…
– … and second my next research report with my latest stock idea for all my members to benefit.

The slogan “drill baby, drill” creates the expectation that production volumes of oil and gas, mainly from shale fields, i.e. the “dirties form” will rise meaningfully through more drilling activity with the next administration taking over.

Shale or fracking as it also called, because conventional energy production is only a shadow of its former self, as I will show later in this Weekly.

If it were that simple, I could likely skip this article.

Not because it were clear to buy the big names, but because then you would need to AVOID energy producers. Yes, you read correctly.

This makes sense as the equation would be more drilling = more energy available = lower prices due to higher supply. In the worst case scenario, a supply glut would have the potential to even crash energy prices. With the Chinese growth story of the last decades likely not being the driving force anymore, this is a realistic scenario.

Lower energy prices would not necessarily be to the disadvantage of consumers.

But especially US producers or such with a big business on US soil would see their profits plunge, not rise. After the drought period of the last decade, however, energy producers have become more conservative. Instead of kicking off a death spiral by going for volumes, they decided to strengthen their finances and to only pump where the most profitable oil and gas projects are. Profitability, not volumes.

This reduced production costs dramatically, but also supply.

The other part of the truth is that strict ESG policies made the entire business environment tougher. Being it land leasing, drilling and searching for new resources or pipeline and export terminal permits, not to mention raising capital – everything became either more difficult or not possible at all.

Both taken together have resulted in higher average prices. Yes, oil and gas prices started to rise already prior to the disruptions of 2022, even surpassing the highs of the years pre-2020. Many companies today have clean balance sheets, strong margins and returns on capital. Why should they crash energy prices?

To make it a bit spicier, even if for whatever reason producers went all in and drilled like crazy – there’s even the risk that production won’t increase, despite more drilling! What sounds confusing, is even a not unlikely scenario.

There are quite a few interesting things to know about.

This Weekly will give you an overview of the situation. What should be expected from the energy sector under a Trump 2.0 administration? Are energy producers a good pick or does it make sense to think around the corner for maybe a more lucrative idea?

My members exclusively will get to know.

In my latest research report, due later this week, I’m discussing an idea with a strong setup for both, keeping the status quo, but also higher drilling activity. The company has a strong market position and is generating healthy cash flows. Debt has been meaningfully reduced and shareholder returns are on the rise.

All this basically for pennies on the dollar.

With my risks-first approach (paired with high upside), I am able to find stocks with great returns.

Though currently not completely ahead, my ideas continue to make up lost ground. Over the past weeks many ideas have performed very well with more expected. There are several different catalysts on the horizon. All, with more favorable risk and reward ratios.

Join me and my members on our journey to beat the markets!

^{both as per 04 December 2024 market close – since August 2022}

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More or less drilling, more or less oil and gas?

The first thing that came to my mind was that by turning on the drilling machine aggressively, oil and gas volumes would rise with the logical consequence being lower energy prices due to a supply increase (likely outpacing demand).

The perfect recipe for a bear market in energy stocks.

With Trump having campaigned with the prospect of lower energy prices, even by half, the above would primarily benefit consumers and maybe Donald Trump himself, as energy prices have a correlation with the popularity of the president.

At least high energy prices are very negatively perceived and in the past were the tipping point for one or the other election. Energy is a staple good in our everyday life. And energy is the starting point for many of our products, but also the backbone of the transportation of goods. Thus, higher energy prices = higher cost of living.

High energy prices can be the killer for an administration, especially with sharp rises.

Thus, promising lower energy prices by increasing supply reads like a good thing for consumers, but rather the opposite for producers.

Taking notice of the above without further questioning it, it does not make any sense that stocks of energy heavyweights ExxonMobil (ISIN: US30231G1022, Ticker: XOM) or Chevron (ISIN: US1667641005, Ticker: CVX) have first reacted even modestly positively to the election results.

Over the last four weeks, Chevron has even risen a bit, while Exxon went sideways.

The market does not seem to be full convinced Trump will keep his promise.

Otherwise, we’d likely have seen a sell-off of the entire sector which didn’t happen. It seems the market wants to tell us something.

This is further supported by a recent statement from no other than Exxon’s CEO. Straight to the point, he said that “drill baby drill” is not on the agenda.

Chevron’s CEO during the last conference call after Q3 2024 earnings, a few days before the election, also concretely laid out that Chevron is planning with a plateau.

The focus will be on maximizing free cash flow, not production volumes.

Value over volume is the opposite of “drill, baby, drill”.

By the way and as a side note, I’ve found it interesting that wind energy behemoth GE Vernova (General Electric’s spun-off wind energy subsidiary, ISIN: US36828A1016, Ticker: GEV) likewise has not seen a stock price crash.

To the contrary, this stock is even up by roughly 20% – outpacing Exxon and Chevron.

Maybe instead of oil and gas up while wind and solar massively down, we’ll see a more balanced and pragmatic approach?

A few days earlier, there was an article in the WSJ pointing in that direction.

Called Trump’s “oil allies”, some mighty industry heavyweights are not necessarily in the starting blocks for higher outputs, because they know this would crash their profits and thus stocks. The last bear market starting from 2013 / 2014 was simply to painful.

So why not a middle-of-the-road strategy?

Instead, the preference goes towards less regulation and a reversal of several of the policies from the soon-to-be previous administration like pushing electric vehicles, but also for example blocking permits of pipelines (see here).

More fuel to the fire came from the nomination of the new head of the department of energy – a shale or fracking veteran. Chris Wright, Donald Trump’s pick to lead the agency, due to his background might have spooked the environmentalist camp.

However, in a Forbes article they write that Wright is also engaged in geothermal energy projects, making him more a pragmatist – exactly what is needed. Pragmatism, not ideology should be the path forward. Wright is quoted with being an advocate of reliable, affordable and secure energy.

Part of it, respectively the cornerstone, though, are clearly oil and gas. They are proven and the infrastructure is in place. They are reliable, affordable and secure. And there’s enough of it available, especially in the US.

From the article, giving a good first impression of what might to be expected:

In the United States, wind and solar energy now generate 16% of total electricity. But Wright is not a fan of those technologies, in part because they require huge land areas and are intermittent–the wind has to blow and the sun has to shine, which means batteries are needed to store their energy for when it’s needed. He doesn’t believe they carry a softer societal and environmental footprint. The batteries are dependent on cobalt mines in Congo, while the solar panels are made with what he describes as “slave labor” polysilicon fabrication plants in China. Wind turbines, for their part, with their steel towers, fiberglass blades and cement bases, are made at plants powered by coal and gas. “All energy production involves trade offs,” he says.

From the Wall Street Journal article from above, the message from industry representatives is that the game plan should not be and would not be to drill for the sake of drilling. What is targeted is besides less regulation and disclosure requirements, to curb LNG exports.

The current administration blocked permits to open up new LNG terminals.

As the US produces more than enough natural gas to service its domestic demand, the obvious is to export what is left over to Asia and Europe – at a massive premium of course.

The US are already the biggest exporter of LNG, but more potential is seen in this area.

In a different WSJ article and also in their newsletter, I have stumbled upon the following interesting graphic below.

While the public perception seems to be more that democrats are bad for oil and gas, while republicans the other way around, the tendency seems to be more that free cash flows were higher when it was not necessarily expected.

Reasons and explanations can be different.

But the last column speaks for itself. Extreme regulation and suppression of new supply has clearly benefitted margins and cash flows. The surge in 2022 is one reason, but that was just one year of four.

Anybody wants to tell me energy producers will voluntarily give up on this status quo?

Another until here not discussed factor which could support oil and gas stocks is valuation multiples in connection with ESG.

On Bloomberg, there were several headlines pointing in the direction of Trump 2.0 killing ESG. And they suddenly also claim that ESG policies were never meant to win which did sound differently in the past.

The consequence from all the above is likely that “dirty” energy stocks could come into fashion again. With less ESG and energy stocks not being labeled as dirty anymore (or at least much less like being a “pragmatic solution” or the like, just think of defense stocks which also made a “successful” shift), deep pockets could more easily justify to pour money back into this hated sector.

Thought further, nothing speaks against sector leaders like Exxon or Chevron seeing earnings multiples of at least 15x, if not even 20x again. This would be an upside of at least 30%, maybe 50%, assuming that more drilling does not kill profits.

It remains to be seen who will be right and in which direction we go.

However, I wanted to add another layer to the building. In the intro section, I wrote that conventional energy production today is only a shadow of its former self.

Interestingly, herein an eye-brow raising parallel can be found. But first, here’s the energy production profile, showing conventional and unconventional (i.e. fracking) energy production:

The graphic shows that until the early-1970s the US was a growth story in terms of conventional energy production. Subsequently, after the peak, total energy production fell for decades (!) and roughly halved (while demand increased) to find its bottom only until the shale revolution after the financial crisis allowed for a resurgence of energy independence of the US.

Fracking even turned the US from a net energy importer into an energy exporter. This wasn’t just a small find, but a huge generational shift.

If you look closer, you will notice conventional production is still falling.

Thanks to the shale revolution, with time even the old peak from the 70s was breached and new highs were made. Even twice, once at the peak in 2013 / 2014, right before the brutal bear market hit and then we see two higher tops later on.

However, the high of 2019 has not been taken out.

In the past, I had written about (referencing to GR’s work) many shale fields having seen their peaks in productivity and hence also total production by volumes (see here).

This thesis hasn’t changed. Only the Permian Basin, the biggest shale field, located in Texas and New Mexico, has managed to post higher production numbers post 2019. If it reaches its plateau, too – remember what Chevron’s CEO said? – then we might be discussing an entirely new paradigm.

There’s still a broadly underestimated risk that the second wave, i.e. shale might have peaked, just like conventional energy production in the 1970s.

G&R in their highly recommended reports argue that after half the inventories have been drilled, fields tilt and start to roll-over. The more mature fields have that tipping point already behind them. Productivity per well has fallen, so has total energy production. The Permian stands in line to be next with the question being when rather than whether at all.

Likely the main reason while this hasn’t made it to the bold headlines is that producers have been drilling their best wells so far to avoid a crash in production output. Not only is total rig count declining, but productivity across the board is falling.

No new highs have been made in output per rig (see EIA report here).

In this context, I wanted to – again borrowed from GR’s great work (see here) – show two quotes and a last chart to close this Weekly.

“Let us pledge that by 1980, under Project Independence, we shall be able to meet America’s energy needs from America’s own energy resources.” 
– President Richard Nixon, November 7th, 1973 

“We will lower the cost of energy. We will drill, baby, drill. We will do it at levels that nobody’s ever seen before.” 
– President Trump, Republican National Convention, July 19th, 2024

The problem is, when mother nature does not want to follow suit, the boldest headlines or plans do not have to materialize as aspired.

Case in point, the 1970s – when conventional energy production peaked for good in the US – saw the phenomenon of falling oil production by volumes, however, at the same time rigs, i.e. drilling activity, was massively on the rise!

Over the ten years between 1973 (Nixon quote from above) and 1983, rig count in the US had more than doubled. Temporarily even almost quadrupled. The best that was achieved was a flat production from about 1978 onwards (however, only temporarily as we’ve seen earlier).

Clearly not what one would expect.

With indications for a peak of the Permian Basin and thus the entire US shale revolution in the not too distant future, even if they wanted to, “drill, baby, drill” is no guarantee for higher energy output.

There is even the risk of first peaking and then falling energy production which would send energy prices even higher – despite more drilling to try to keep volumes stable.

Likewise interesting, despite “slowing demand” and “surging US shale production” commercial inventories in the US (excluding the strategic petroleum reserve, SPR) are currently at their second-lowest level since 2016.

Strange, isn’t it?

Meanwhile, the SPR has been barely re-filled after it was drawn down massively in 2022 in light of temporarily exploding oil prices.

I guess this is a scenario the majority is clearly not prepared for, because it doesn’t sound very logic at first sight. However, by thinking things through, it is logic and also supported by historical evidence and a precedent.

That’s why I have been thinking lately about how to benefit from such a scenario. The result is my latest stock idea for all my members. Absent of a major energy price crash and collapsing demand – which I honestly lack the imagination to see at the moment – it does not even matter whether there’ll be more energy production or not.

Of course, higher energy prices would be supportive for my case, no question about it.

But the current price level is already sufficient. Under this scenario, I am seeing an upside of 50–100%, simply due to market share gains and an absurdly low valuation, paired with ongoing aggressive debt reduction and buybacks. Cash flows are strong and the entire sector is not repeating a huge mistake it did in 2013 / 2014 when the bear markt hit them really hard.

Conclusion

I am discussing Trump’s “drill, baby, drill” promise from different angles.

The results are first that one should expect something unexpected…

… and second my next research report with my latest stock idea for all my members to benefit.

By becoming a Premium or Premium PLUS Member, you get instant access to all my already published research reports as well as several updates.

Likewise, you qualify for eight, respectively three more exclusive reports with my best investment ideas plus updates on the featured businesses over the next twelve months.

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