Key Questions: Energy: Who Wins and Who Loses Under a New Administration?

With the U.S. presidential election fast approaching, certain sectors may exhibit considerable volatility. Such may especially be true with the energy sector, begging the question: Who wins and who loses under a new administration?

I will add a caveat to this essay by noting that no one will be able to forecast with certainty how the future will pan out. In fact, as our CIO noted previously, markets often respond to events in counterintuitive ways.¹ With this in mind, we have some thoughts on how certain industries in the energy sector may perform under various election scenarios.

A prevailing view among investors is that a second Trump administration will be good for energy stocks and a Harris administration will be bad. If Trump wins, we expect energy stocks will likely move higher, but this trade will likely be short lived as underlying company fundamentals change. More specifically, a second Trump administration will likely be better for the defensive midstream (pipeline) companies versus oil producers. This view is the result of thoughtful analysis and a thorough understanding of the history of this industry.

As I wrote a few weeks ago,²  the energy sector is driven by underlying commodity prices, as the oil that one Exploration and Production (E&P) company produces is broadly the same oil that a rival E&P produces. For simplicity, there is no way that any E&P can extract a “better” oil out of the ground than competitors. This is important to keep in mind as we analyze the impact of different political administrations. Trump has taken an energy friendly view in terms of easing environmental and business regulations to promote oil production aimed at enhancing American energy independence. And while this is often helpful for consumers in terms of lower energy prices (as production increases relative to demand, prices of the underlying commodity decline), it is less good for oil producers.

This is a view supported by historical returns: Over the four years spanning Election Day 2016 to Election Day 2020, the Oil and Gas E&P index fell 57%. Over the same time frame, the Oil and Gas Transportation and Storage index (midstream/pipeline companies) only fell 26%. Contrary to expectations, the risk-on energy trade of owning E&Ps in a Trump administration provided worse returns than owning the defensive midstream companies.

Obviously, the data is somewhat skewed by the global COVID-19 pandemic that roiled all markets, especially the energy sector. But if we end our comparison prior to the outbreak of COVID (in January of 2020), the midstream group was positive by about 20%, whereas the Oil/Gas E&P group was down 10%.

As a point of clarity, we do not expect a potential second Trump administration to be as devastating for the energy space in the same way it was during the first Trump administration, as E&P companies have become much more disciplined with their capital and focused shareholder returns versus increasing production.

Additionally, a second Trump administration may unlock some levels of economic growth via lower taxes and a less restrictive regulatory environment across the board. Still, caution is warranted, as a significant boost in production could result in weaker prices.

On the other side, how might a Harris administration impact the energy complex? A Harris administration will likely follow the Biden administration’s more restrictive approach to pipeline development. That said, a little discussed fact remains that the Biden administration has been incredibly constructive for the energy sector.

Increased scrutiny on E&Ps has promoted capital discipline, which has generally supported the underlying commodity price and corporate profits. E&Ps have also been able to maintain such financial discipline as U.S. oil production has increased to approximately 13.3 million barrels per day (mmbpd), up from 11.0 mmbpd.

In response, E&Ps have returned a whopping 300% since the 2020 election through mid-September 2024, handily outperforming pipeline companies, which have generated a still-impressive 215% return. Such returns are unlikely to repeat in the short run given that some of the performance was triggered by a sharp rebound as COVID pressures abated and the U.S. government flooded the system with stimulus.

Additionally, a Harris administration will likely put pressure on the midstream group. The midstream group relies on a network of pipelines to transport a variety of fuels from production facilities to refining facilities to export facilities. For a new pipeline to be built, the operator must navigate a myriad of government regulations.

The Biden administration has been less constructive for the space. Specifically, we point to the Keystone XL pipeline project. This project was proposed in the early days of the Obama administration. Citing environmental concerns, the Obama administration rejected the project. Several years later, the Trump administration sought to revive the project. Several years later, following more environmental backlash, President Biden revoked the permit for the project in his first day in office. In 2021, the project was abandoned after over a decade of political brinksmanship.

This is just one story that illustrates how a Harris administration may be less favorable to the group. Pipelines rely on expanded networks to access better pricing and provide revenue growth via expanded tolling opportunities. When this growth is negatively impacted, so too are future earnings estimates.

In summary, industry dynamics may vary based on which candidate wins the presidency. But such dynamics are difficult to predict ex-ante. Moreover, how certain stocks within a given industry perform are frequently counterintuitive.

Thus, we will continue to apply careful scrutiny when researching the energy sector, as we do with all sectors, and investors should remain diversified and emphasize quality in the weeks ahead.