Energy: 'It's an attractive time to be looking at the energy sector' as oil prices fall, analyst says

Tortoise Portfolio Manager Rob Thummel analyzes energy market trends, the direction of oil trading amid pressures tied to OPEC+ production cuts, and the outlook for renewable energy producers.

Video Transcript


SEANA SMITH: What a difference a year makes. Energy stocks were the top performer last year. But almost halfway through 2023, they're completely reversing course. So is there an opportunity at these levels. Let's talk about it with Rob Thummel, Tortoise Senior Portfolio Manager.

Rob, it's great to see you again. So certainly was a high flyer last year. This year it has been under a tremendous amount of pressure. Do you think we'll see a recovery soon?

ROB THUMMEL: Well, I do, I do. And I think for this reason, number one, the energy sector is really essential. We need a lot more energy, both domestically and globally, for the economies to continue to grow. And that's not going to change. It hasn't changed in decades. And it won't change for decades to come.

But the number one fundamental reason why that the energy sector really is compelling and attractive to investors is there's a lot of cash flow from the sector. And so what that means for the sector is it's going to offer a lot of dividends and then also buybacks and stock buybacks. And so you've got those two factors, visible cash flow and really uncertain times like we are in right now. That usually means that those types of sectors will do fairly well over the next several months.

AKIKO FUJITA: Rob, let's talk about what the demand picture looks like right now for oil. We've heard over and over, China, a potential big catalyst with their reopening. But you look at recent data. It does point to the fact that the ramp-up has been slower than expected. What's the timeline you're looking at right now? And how much upside do you see, especially with some of these bigger oil names, as a result of that?

ROB THUMMEL: Yeah, so you've seen the oil markets trade off, clearly the oil price come down, the natural gas price come down, in the case of natural gas quite substantially. The first quarter is always tough for oil markets because you've got a lot of refineries that are offline. So oil demand drops temporarily.

The whole world is waiting on when does the Chinese economy reopen. And it's gradually reopening. And so we expect the demand for oil globally in China to grow and accelerate throughout the rest of this year. Currently, the global oil market is probably slightly oversupplied. It's going to flip to being undersupplied sometime in the late second quarter or early third quarter.

And when that happens, you're going to see it. When the oil market is undersupplied, typically you see a positive price response. So we would expect oil prices to rise a bit. And then how does that relate to the energy stocks themselves?

Now, if you look at Exxon, Chevron, typically they trade higher when oil prices go higher, and other energy stocks, as well. So now with oil prices where they are, that's why we think at Tortoise it's an attractive time to be looking at the energy sector because prices are probably low. They're probably going higher. And that will just result in an uplift of all energy stocks.

SEANA SMITH: Rob, I think there's also a big debate going on right now just in terms of how much power OPEC has when you compare it to historically speaking. And when you talk about the cuts that they announced, what that exactly means for the energy market how, big of a impact specifically do you see OPEC having on the energy market today?

ROB THUMMEL: Well, they still cover, what, 40% of the market or something like that globally as far as production is concerned. And so yeah, they still have a pretty significant piece of the market share. They have a lot of information with regards to demand, both domestically, but more importantly, globally in terms of where oil demand is.

So they can make moves as they see it, probably with better available information than any of us. And so I think they still do play an important role. The US will continue to grow production. The US is still important.

The world still needs more US energy. It still needs more US oil, still needs more US natural gas. And that dynamic is not going to change any time in the next decade and beyond. So the US still plays a really important role.

AKIKO FUJITA: Rob, let's talk a little bit more about clean energy stocks. We saw them rally in a big way on the back of the passage of the Inflation Reduction Act. Still a lot of assessment happening about to what extent that could be a further catalyst. But if we slice it between sort of solar, even hydrogen, what are you liking in that space? And is this actually a good time to get in right now?

ROB THUMMEL: Yeah, well, so at Tortoise, we look at kind of an all-of-the-above approach to decarbonization. The world needs to decarbonize. So solar's important. Wind's important. And those are happening right now. In other words, the world's decarbonizing right now, using more and solar and wind to generate electricity, using less coal.

In the future, we think there's a lot of potential for things, as you mentioned, like hydrogen and carbon capture. That's important as well. What you need to help accelerate the growth in those areas are infrastructure. And you need more infrastructure and pipelines to be able to transfer the carbon, pipelines to transfer the hydrogen. So we think that that's really important and critical and in order to get the wind-- or sorry, the hydrogen and carbon capture, even with the credits, more competitive.

Biofuels are also interesting as well. You look at what's going on with renewable natural gas and renewable fuels, basically creating transportation fuels where the raw material is not a fossil fuel. Instead, it's things like used cooking oil. That's really interesting to us as well. And so those are all opportunities for investors, as we see, over the next-- well, really over the next decade as well.

AKIKO FUJITA: How do you play this space though?

ROB THUMMEL: Well, yeah, there's that. That's a good question. Well, what I would say is, in a lot of ways, you can play it through some of the major indices or some of the ETFs that focus on solar or wind.

Some of the specific companies? Well, big picture, Chevron and Exxon are doing a lot in this space as well. But obviously, they're predominantly oil and gas companies. So you can play it through, frankly, Chevron and Exxon because, if any of this is going to accelerate, you're going to need Chevron and Exxon to participate.

But if you want to play pure play, whether it's renewable fuels or biofuels or things like that, there are companies like a Green Plains, which is an example of a company that's actually predominantly biofuels, specifically focused on some of the biofuels that are going to grow, like ethanol and ethanol production and things along those lines.

There's obviously some pure plays on the hydrogen side as well. They're a little more startup at this point. And so from our perspective, we think probably the best way to play it is through the major energy players because those are the companies that are going to benefit the most longer-term and make the biggest difference.

SEANA SMITH: All right, Rob Thummel, Tortoise Senior Portfolio Manager, thanks so much.