What could the results of the US presidential election mean for oil and gas equities?
We always consider a range of outcomes on key issues depending on who takes the White House, but the main takeaway is: “It doesn’t matter.”
Energy equity performance during the last 36 years vindicates this response: There’s no clear relationship between the party holding the presidency and energy equity performance or outperformance.
Including Congressional control shows no relationship, either. Energy has performed better under the Democrats, but we find that to be coincidental to other, more important factors. The same holds true for US production output, which grows regardless of who’s in office.
That’s not to say oil companies are immune from potential presidential actions—just that issues outside the president’s control matter much more. In the end, buying at an attractive valuation is what matters.
Republican or Democratic Control Doesn’t Matter for Energy Performance
From election to election, we find the energy sector outperforms the wider S&P 500 by an average of 16% during Democratic terms, versus only 3% average outperformance during Republican terms in office.
Does that mean we think a Kamala Harris victory would signal a buy for the energy equities? Hardly.
Putting that performance into context shows that timing and outside factors in which the US president was largely a bystander played a much larger role.
Recent history provides the best examples.
During President Joe Biden’s term to date, beginning with his election, the energy index has delivered a staggering outperformance of 136%. However, the measurement period begins in the depths of the covid-19 pandemic. Meanwhile, this also marks the end point for performance during the Donald Trump administration, largely explaining the decline during his term.
Many other periods of strong energy out- or underperformance share similar characteristics:
- Bill Clinton’s second term saw energy underperformance owing to the dot-com bubble.
- George W. Bush’s first term saw energy outperformance due to the bursting of the dot-com bubble.
- Barack Obama’s second term saw energy underperformance, with an oil price collapse caused by US oversupply.
There are myriad other events during the past 36 years—most notably the two Gulf Wars and the global financial crisis—that had meaningful impacts on oil prices and influenced returns for the overall market and energy equities.
In these cases, the US president had little influence on the industry and was not responsible for direct policy initiatives aimed at it. Instead, larger geopolitical events held sway.
While the US president surely played a role in the initiation of and response to all three events, the impact on the US oil industry was unlikely a consideration.
Pay Attention to Valuation, Not Polls
We find valuation, specifically Morningstar’s price/fair value, to be a much better indicator of how energy is likely to perform in the coming years than a political poll. In fact, it has proved to be a reliable indicator during the last 10 years and was especially prescient for the Trump and Biden terms.
Preceding Trump’s election, the energy sector was remarkably overvalued, with a price/fair value of 1.3. This was followed by a 41% decline in the index and 87% relative underperformance. Although we couldn’t have foreseen the pandemic, we wouldn’t have recommended shares regardless.
Conversely, prior to Biden’s election and energy’s subsequent 189% return and 136% relative outperformance, the index stood at a price/fair value of 0.53: a clear buy. Investors who ignored any common perceptions about which presidential candidate would be best for energy stocks and just bought on valuation were rewarded.
So, would a Trump or Harris administration be better for energy stocks? Who knows?
But it doesn’t matter. What matters is that the index is trading at 0.92 currently, a slight discount. Unfortunately, it’s not the same clear signal we were sending in 2016 and 2020, but it’s better than what the polls could tell you. Looking at our own coverage shows energy to be fairly valued as well at a 0.97 price/fair value.
Within integrated oils, we think Exxon Mobil XOM and Chevron CVX stand out, while APA APA is an attractive exploration and production firm and Schlumberger SLB is an appealing service firm.
So, Should Energy Investors Care Who Wins?
We don’t suggest that investors in oil and gas companies can expect the same policies in a Trump or Harris presidency.
However, the drivers of energy equity performance are much larger than who sits in the White House, and those drivers are inherently unpredictable—unless, of course, one thinks war in the Middle East and skyrocketing oil prices are more or less likely with the election of one candidate over another.
That said, we are keeping our eye on numerous issues that we expect could have different outcomes depending on the presidency.
- Inflation Reduction Act: Although largely opposed by the industry, the industry has since come to rely on elements of Biden’s hallmark legislation, specifically credits for carbon capture, biofuels, and hydrogen. Reports have large firms voicing their support for the legislation to the Trump campaign, given his threats to gut it. Many of these credits also support projects in red states, whose politicians will also likely voice support. As such, we think those elements would likely remain intact in a Trump or Harris administration, although a Harris administration might work to expand electric vehicle and renewable energy credits that ultimately compete with the oil and gas industry. Those elements are unlikely to have marginal impacts on oil and gas demand and, even then, likely only in the long term.
- Federal Trade Commission Scrutiny of Mergers and Acquisitions: The recent flurry of oil and gas M&A has largely been approved by the FTC, although reviews in some cases have taken more time. Occidental’s OXY acquisition of CrownRock was ultimately approved but delayed for repeated information requests. Most notable were the requirements related to the acquisition of Pioneer Natural Resources by Exxon and the pending Hess HES acquisition by Chevron. In each case, the FTC forbid the founders of the acquired companies from joining the boards of the acquirer on the grounds they colluded with OPEC to set oil prices. The industry was taken aback by the charges that were disputed by both founders. However, Exxon and Chevron ultimately agreed. Similar requests might continue in a Harris administration, whereas a Trump FTC would likely be more permissive. However, in any case, it’s unlikely the FTC enacts meaningful barriers to future M&A.
- Drilling Permitting on Federal Land: In early 2021, the Biden administration instituted a moratorium on permitting that resulted in the number of horizontal drilling permits on federal land plummeting. The effect was particularly acute in the Permian Delaware Basin in New Mexico, where 65% of active permits are on land with federal mineral rights, according to Rystad. However, permits quickly rebounded after the moratorium expired after the first quarter of 2021 and remain steady today. Although Harris has opposed fracking in the past, she has not made it a key element of her campaign this year. Also, the Biden administration has not reinstated the ban since. Although Rystad estimates by 2029 there could be at least 645 mb/d of new oil production coming from undeveloped inventory on federal land, it rates a reinstated ban by a Harris administration as unlikely. We tend to agree in part, given a desire to keep oil prices in check.
- Liquefied Natural Gas Export Permitting: In January 2024, the Biden administration announced a halt to new LNG export licenses to key Asian nations and other nonfree trade partners of the US. A federal court overturned that order in July, and the administration has since granted an export permit. The series of events makes it hard to gauge how a Harris administration might handle the permitting going forward, but it is much more likely to consider a halt than would a Trump administration. In this case, a Trump victory would be a clear benefit to the industry as it would remove the uncertainty, but it’s not a given that we’d see a different outcome with a Harris victory.
- Emissions Regulation: Harris and Trump administrations are likely to take different approaches on regulating emissions, with Harris likely to continue Biden’s Environmental Protection Agency enforcement of methane emissions that was recently upheld in the Supreme Court. The enforcement would result in higher costs that the whole industry is likely to oppose. However, of the larger companies we cover, most have already adopted some form of methane and operational emissions reduction targets. They might be likely to favor industrywide standards that don’t leave them at a cost disadvantage. Many emissions abatement reduction projects are net present value positive, with recaptured product paying for itself. As such, while the Harris administration is much more likely to enforce stricter emission reduction efforts, we think that the impact on larger companies might not be materially different from what they would potentially do themselves. However, those smaller producers with operations in higher-cost areas outside the Permian Basin would be at risk.
Ultimately, we think the more critical factor for energy equities is that investors continue to demand capital discipline from these firms. In other words, given the investor-enforced discipline, we do not see firms meaningfully changing their investment plans based on the outcome of the election but adapting and moving forward regardless of the outcome.
This article was compiled by Emelia Fredlick.
