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Election Proofing Your Energy Portfolio

Election Energy

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.

Odds

Source: Real Clear Politics

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."

Related: China’s Crude Oil Imports Are Slowing Down

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.

Trump Winners

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.

Demand

Source: Axios

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 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 

Energy Select Sector SPDR Fund (XLE) 10-Year Change

Energy

Source: CNN Money

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.

Right now, we might be at that point with Exxon Mobil Corp. (NYSE:XOM). XOM is currently down 51% in the YTD, levels last seen nearly two decades ago.

Fossil fuels are unlikely to ever become a  major growth industry again. But as we've seen with sectors in terminal decline such as tobacco stocks, industries in a downtrend can still be solid investments when investors strike at the right time. Exxon seems to fit the bill with a 10% dividend yield and some of the lowest production costs in the shale sector, including a historic low-cost find in Guyana.

Another major factor: Exxon Mobil has survived every major energy downturn thanks to a strong balance sheet. This is unlikely to change in the near future.

#3. VanEck Vectors Russia ETF

There's no question that U.S.-Russia relations have been a key tenet of the last three presidential administrations. Russia has continued to loom large over U.S. politics with allegations that Trump's administration benefited from Russia's tampering in the 2016 elections and, more recently, that Russia put a bounty on U.S. troops in Afghanistan.

Despite this back and forth, Washington has generally enjoyed better relations with Moscow under Trump than previous presidencies such as Bush's. That's a win for Russian equities if Trump gets re-elected.

The VanEck Vectors Russia ETF (RSX) gives you major exposure to Russian oil and gas companies, including Gazprom, Lukoil, and Rosneft.

Winners under Biden

Back in June, Joe Biden pitched his highly ambitious $5 trillion climate plan. 

Biden says dramatic clean energy investments will be necessary if the U.S. is to match the EU by becoming a net-zero carbon emission country by 2050. Biden has proposed a staggering $1.7 trillion in federal spending over the next decade to achieve this goal, with the private sector expected to chip in the balance. Biden also says the taxpayer costs can be recovered by repealing the generous tax bonanza that Trump granted U.S. companies.

The Democratic presidential candidate just doubled down on that pledge during the first presidential debate, saying that zero coal plants will be built under his watch.

Further, Biden has endorsed the Green New Deal.

Last year, House representative Alexandria Ocasio-Cortez of New York and Senator Edward J. Markey of Massachusetts, both Democrats, proposed the Green New Deal, a nonbinding congressional resolution that lays out a grand plan for tackling climate change by meeting 100% of the power demand in the United States through clean, renewable, and zero-emission energy sources. 

 

In short, a Biden presidency is likely to be a huge win for the renewables and clean energy sectors.

Here are some likely winners if the Blues end up carrying the day.

#1. First Trust NASDAQ Clean Edge Green Energy Index Fund 

All three top-performing energy ETFs of the last decade belong to the renewables camp, and none did better than the First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN). With assets under management (AUM) of $252.66M, an expense ratio of 0.60%, and YTD return of 78%, QCLN is one of the best clean energy ETFs in the U.S. market.

Clean

Source: CNN Money The fund invests in growth and value stocks of energy, oil, gas, and consumable fuel companies that directly promote environmental responsibility. The index is designed to track the performance of small, mid, and large-cap clean energy companies in the United States.

QCLN has managed a total return (including dividends) of 207.5% over the past 10 years. That might not compare well with the S&P 500's total return of 245.2% but still handily beats the -16.3% return by XLE over the timeframe.

Related: Libya Oil Production Hits 300,000 Bpd As Another Oilfield Comes Online

It's quite likely that the combined opposition from the Democrat's moderate wing and from Republicans will make it hard for proposals such as the Green New Deal and Medicare for All seeing the light of day. Still, it's safe to assume that green energy and infrastructure will be a top priority under Biden.

#2. Brookfield Renewable Partners LP

At a time when energy MLPs (Master Limited Partnerships) are mostly struggling, it comes as a breath of fresh air to find one that is flying.

Brookfield Renewable Partners LP (NYSE: BEP) is an MLP that owns a portfolio of wind, solar, hydroelectric, and other green-energy properties.

Recently, Plug Power (NASDAQ:PLUG) announced an agreement to source 100% renewable energy supplies from Brookfield Renewable Partners to fully energize its planned green hydrogen production plant, one of the first industrial-scale facilities in North America. The hydrogen sector is one of the hottest corners of the renewable energy sector right now, with the hydrogen market projected to hit $11 trillion over the next three decades.

This makes Brookfield Renewable Partners LP-- a 60%-owned renewable-energy affiliate of Brookfield Asset Management--one of the best stocks to own under a Joe Biden presidency.

#3. Tesla

Returning to the green-energy theme, Tesla Inc. (NASDAQ:TSLA) looks like a natural beneficiary of a Biden presidency.

Biden has openly stated that one of his going green targets will be to make the U.S. a leader in the global EV space. Despite facing growing competition from the Middle Kingdom, Tesla clearly remains the largest and most popular pure-play EV company.

Tesla has, of course, been shooting the lights out without needing a Biden endorsement. TSLA is up 413% YTD and has been rallying hard as investors expect to beat Wall Street expectations yet again during its upcoming Q3 earnings call.

Tesla's latest trick: to make Models 3s in China with cobalt-free batteries.

Tesla has been phenomenal under a president whose latest campaign has largely been supported by oil and gas interests. Having one that actively supports the industry should not hurt, either.

By Alex Kimani for Oilprice.com

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