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The U.S. may need 'more natural gas to decarbonize the rest of the world': Strategist

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Tortoise Portfolio Manager Rob Thummel joins Yahoo Finance Live to discuss the Inflation Reduction Act and how the U.S. energy sector can benefit from it.

Video Transcript


SEANA SMITH: Chevron and Exxon posting record profits, driven by higher oil prices during the most recent quarter, net income tripling from a year ago after oil prices nearly doubled. Today we're looking at crude just under $100 a barrel. Let's talk about what this means going forward.

We have Rob Thummel. He's Tortoise Portfolio Manager. Rob, certainly a strong quarter here from both Exxon and Chevron, record profits from both of those companies. Over the last couple of weeks though, we have seen crude back below $100 a barrel. How does this set us up for the second half of the year?

ROB THUMMEL: Yeah, well it sets up for the whole energy sector, really, a lot of cash flow. So Exxon, Chevron are up, like a lot of the energy sector this year, relative to the S&P 500. Why? Well, because the sector generates a lot of cash, a lot of free cash that they can then distribute to shareholders in the form of dividends, debt reductions, and stock buybacks.

And so much of the same is going to happen in the second half of the year that's happened in the first half of the year. So that's why we're really bullish on the energy sector, really for the rest of this year and, quite honestly, into the near future.

DAVE BRIGGS: I want to ask you about a bit of a surprise in the legislation that just ran through DC. It was about climate. It was called the Deficit and Inflation Reduction Act. But in it, a surprise boost for the oil and gas sector. Tell us about that.

ROB THUMMEL: Yeah, I think this is really big. So I think politicians have really starting to figure out, Dave, that to get this climate solved, get this climate challenge solved, to decarbonize the world, we need an all-of-the-above approach. So we need more wind. We need more solar. But we also need more natural gas. And we actually need more US natural gas to help decarbonize the rest of the world.

And so included in this particular act is a provision that will boost oil and gas production in the future. And then there's, I guess, a side agreement or a separate agreement that's going to happen at some point in time that will improve the permitting for exports of natural gas as well as more pipelines that we're going to need to transport more natural gas into the future.

So all of this, I think, is really eye-opening for everybody and should be really encouraging to everybody who's concerned about US energy and US as a superpower because it alleviates a lot of those concerns because the US now will be able to produce more energy. It will be able to produce less carbon but not only domestically but globally as well while maintaining energy security, which is really important.

RACHELLE AKUFFO: And well, we know all of this tends to get lumped together. But talk about how far the US is when it comes to natural gas versus, say, traditional oil and gas as well.

ROB THUMMEL: Yeah, this is a really important point. So the US is one of the few nations in the world that is actually energy-independent when it relates to natural gas. So what does that mean? What it means is that the US actually produces more natural gas than it consumes. So about 15% more natural gas is produced every day than is consumed.

That excess then allows the US to export that excess around the world. So if you think about what's happened from a decarbonization perspective, US carbon emissions have declined since 2015 by a double digit. A lot of that is because of increased use of natural gas.

Europe, emissions have declined in the last probably 10 years because of increased use of natural gas. The same thing can happen in Asia. The same thing can happen in India if those two countries decide and elect to import more natural gas from the US. So it's a real advantage globally to be energy-independent and to actually have excess of a supply of something. In this case, the US has it in the form of natural gas.

SEANA SMITH: Rob, in terms of some of the larger companies that did report today, Exxon and Chevron certainly have had a strong start to the year, strong first half of the year, I should say. We're entering a different period though, economic slowdown, rising risk of recession. There's a debate, of course, out there about whether or not we are currently in a recession. How much of this do you think has been priced in already to some of these larger energy players and, really, the energy sector at large?

ROB THUMMEL: Yeah, so that's a good question. So I think in general, the energy sector is pretty essential. So it's one of the last things to see, to experience declines in demand. So demand for energy is fairly inelastic is what I'm trying to say in relation to that.

And so where I think we are right now is energy demand has gone up 28 out of the last 30 years globally. We really think that energy demand will continue to rise. And we can have an economic slowdown. And that's fine. You're going to still need energy demand.

And globally, you've still got China and Asia really in lockdown. So that demand has really come down. But when that picks back up, I think we have a bigger risk of continuing to have an undersupplied energy market globally rather than an oversupplied market globally. And what that means is then, we might see oil prices and natural gas prices continue to rise here in the US as well.

DAVE BRIGGS: Rob, quickly and specifically related to Europe and Nord Stream now cutting back to 20% flows to Europe, how severe is that energy crisis about to get?

ROB THUMMEL: Yeah, it's really significant. And obviously, everybody is taking it very seriously. I'm sure you're reporting on it. So if you think about where we are today, obviously, the concern is, in the winter, right? Because in Europe, today they've got plenty of natural gas to serve their daily needs. But in the winter, that flips. And they don't have enough natural gas every day.

So you've got to find new sources of natural gas. Historically, where does that come from? Well, it's come from Russia. This year, maybe a little bit of it'll come from Russia. Maybe none will come from Russia.

So Europe is preparing and bracing by increasing their inventories to the highest levels that they can get to so that they can prepare for a winter where they're not able to get Russian supply. And so that's where they are right now.

You can see it reflected in the natural gas price in Europe. European natural gas prices are six times higher than in the US. That's phenomenal. They're over $50 MCF. I mean, in the US they're at $9. Last year, we were probably in the $3's and $4's in the US, to give you context. It's at a massive price. And it's really a massive problem that Europe will have this winter.

But I'm glad they're preparing now. And I hope there's a scenario where they don't run out of natural gas this winter because it would be devastating globally as well as, obviously, to all of the people who live across Continental Europe.

DAVE BRIGGS: Yeah, it sure would indeed. We will be watching. Rob Thummel, appreciate you being here. Thank you. Have a great weekend.