By Mike Larson
Larson – Hello and welcome to our latest MoneyShow MoneyMasters Podcast segment. I’m Mike Larson, Editor-in-Chief at MoneyShow. And we’re talking today as we’re at a crossroads in the energy industry, trying to figure out how to transition from an oil- and gas-driven world to a clean energy future.
Meanwhile, the utility sector is facing significant upheaval amid a surge in AI-driven power demand and an overtaxed electric grid. Helping to sort out what’s going on and what investors can do to profit are two specialists in these industries. Roger Conrad, editor of Conrad’s Utility Investor, and Elliott Gue, editor of Energy & Income Advisor. Gentlemen, how are you both doing?
Gue – Good. Thanks for having me on the show.
Conrad – Thanks for having us.
Larson – I’m so glad you guys could be here. Like I said in the intro, we have a lot going on in the two industries you specialize in. So let me start with you, Elliott. I follow your work for the Top Pros’ Top Picks newsletter that we put out each day, and you had some interesting comments in your last update. I think you said, “three-plus years into what’s shaping up as a historic upcycle, the big institutions and trillion-dollar passive funds that dominate the US stock market are still chronically under-invested in energy.” You said that won’t last forever. Can you expand on why you said that and what you think we’re going to see coming in the next year or two here?
Gue – Yeah, absolutely. If you think about it, 81.5% of global energy demand is met through the three fossil fuels, the big three fossil fuels, which are oil, natural gas, and coal. And yet, if you look at the S&P 500, the big energy companies, make up — they’re one of the smallest sectors in the S&P 500. In fact, they’re the lowest-weighted sector in the S&P 500.
And at the peak, back in the mid-2010s, right, we saw energy get up close to 15% weight in the S&P 500, but it’s been less than a 5% weight for literally years now. You have technology, communication services being heavily weighted in the index, but energy is basically the small fry.
So, if you think about a lot of the technologies that you just talked about, AI, etc., they use energy – tremendous amounts of energy. But these stocks are actually relatively small. Exxon Mobil (XOM), which is the largest in the S&P 500, is a very small company compared to a name like Apple or Microsoft, right, or really any of the Mag Seven names.
And in many ways, that doesn’t make a lot of sense. In order for us to meet growing demand for energy – not just here in the United States but all over the world, places like China, India as well – there needs to be a lot of investment in new sources of energy or in traditional sources of energy like oil, natural gas, even coal and some alternative energy investments as well.
These companies aren’t large enough to do that in the way they have done in prior cycles. And one of the culprits for that certainly is you have a lot of money indexed to the S&P 500. Every dollar that goes into an S&P 500 index fund, 30% of it goes into tech and less than 5% — less than a nickel out of that dollar, goes into the biggest energy companies in the United States and some of the biggest energy companies in the world. And I don’t think that’s sustainable.
Larson – Got it. Roger, I want to pivot to you and just kind of get the big picture for utilities. I was looking ahead of our chat here at the XLU, and it’s up about 21% year-to-date as we’re talking. We’re always talking about tech, right, and so much attention is focused there. But utilities are actually beating tech and the S&P. So what’s driving that action? And what are some of the things you think that might allow it to continue?
Conrad – Well, I think part of what’s driving it, it’s the same things that Elliott was talking about with the big energy companies. Utilities are historically underrepresented also in the S&P 500 and so on. Every dollar that goes into tech, maybe a nickel goes into utility stocks. And in fact, the largest utility in that index is NextEra Energy (NEE). But it doesn’t even make the top two or three dozen companies.
So, I think we’re seeing some kind of shift to some extent, some technical factors. The fact that we’re talking now about the Fed reversing, or pivoting rather, to lower interest rates, that’s definitely increasing some of their popularity. And I think there’s also been the thesis that higher interest rates were going to sink utilities’ spending plans, which are powering their earnings and dividend growth, and so on.
That was a really big theme. It drove down the prices of these stocks quite a bit last year. And I think over the past year, we’ve seen that thesis really hasn’t played out. In fact, we’ve seen a number of companies increase their spending for the reasons that you cited a minute ago – the AI-enhanced data centers, the new demand there – but there are also other areas that are powering electricity growth.
Really, for the first time in a couple of decades, we’re seeing meaningful real-time increases in demand. So, that’s kind of shaking up the picture. I think that part of the story is yet to play out in the valuations of these companies. But we’re certainly seeing a lot of action in a hurry. That kind of makes me actually a little cautious in terms of telling people to just put a bunch more money in. But the long-term picture is very bullish.
And just to expand on what Elliott said, this is an “all of the above” world for energy. We really need all these different sources. And I think there’s a tendency that people have to couch energy as a binary choice, and there’s good energy and bad energy. The fact of the matter is, we need affordable, safe and abundant energy to run the economy in the United States as well as around the world. So, we think that we’re in just the beginning stages really of a major bull market just because we need a lot more energy, we need a lot more investment in these sectors.
Larson – I definitely want to leave a lot of time to delve into some of the specific names and subsectors in this group, but I do want to briefly touch on the macro and the big picture there, Elliott, when it comes to oil, natural gas, and the supply/demand outlook. How do you see things shaking out with the rest of this year and as we roll into 2025?
Gue – Well, oil right now, I think that one of the big concerns out there in the market is demand, particularly from China. The Chinese economy, to say the least, hasn’t really been doing very well lately. There are some concerns about the long-term rate of growth there being much lower than it was over the prior decade or so, prior to Covid lockdowns.
They saw an initial bounce back in demand after Covid lockdowns were lifted. But since then, it’s just kind of petered out. Overall, I think that could remain kind of squishy or a concern through the rest of this year. Longer term, I think demand for oil is honestly only going higher.
It’s worth remembering it’s not just China out there. India, which has been doing better than China economically in recent years, is seeing the kind of growth in per capita consumption that we saw out of China, say, 20 years ago. That really kicked off the last big supercycle.
Demand for oil here in the US has been actually pretty good. And though we’re not the growth center we once were because we’re a developed economy, I don’t see demand for oil going away. There’s a lot of talk about, maybe, loss of market share to electric vehicles. But I look at a country like Norway. Over 90% of the new vehicles sold in Norway so far this year — in the first half of this year were electric vehicles. And I’m talking full electric, battery electric vehicles. Annual oil demand last year in 2023 was exactly the same in Norway – within a couple of thousand barrels a day of what it was a decade earlier.
The fact is, passenger cars are only one tiny piece of global oil demand. You have industrial demand for oil, chemicals demand for oil, making things like plastic, right? So, I think demand for oil is only going higher. And I think, frankly, the world is going to need new large sources of oil. We really need to get on top of investing in that as a world.
Natural gas is also a very interesting fuel in my view. It’s been a very fast-growing fuel in recent years. It’s much cleaner burning than coal, obviously. You hear things like I see on Twitter or X I suppose it’s called these days, people quoting these stats, like “German demand for natural gas is as low as it’s been since the mid-80s.” And that’s true. But I got to tell you, that’s not good news.
The reason why German demand for natural gas is so low is because their industrial production has been shrinking for years. And what do you think of when you think of Germany? The first thing I think of is manufacturing and engineering prowess, right? They have a huge industrial base. They’re well known for that. And it’s eroding, again as Roger mentioned, due to the lack of affordable energy. Energy costs have soared there so much because of the loss of Russian gas imports and, in my view, overreliance or a too-rapid attempt to shift reliance in favor of intermittent power sources. And that’s not sustainable longer term.
I think that the German voters are obviously already a little bit angry about the poor performance of the economy. You’re seeing that reflected in polling for parties that traditionally haven’t polled very well in Europe, that are considered outsiders, the so-called far right in a lot of these countries. And a lot of that has to do with discontent with the economic situation. And a lot of that is tied up in energy.
So, I do think there could be some squishiness in Chinese demand for oil and gas through the end of this year. If we have a recession, which I still think is a possibility at some point over the next 12 months, you could see a temporary decline in demand. We saw that. We’ve seen that in every supercycle in history. Go back to 2001, 2002, oil had already bottomed in the late 90s and was on its way higher. But we saw some pullbacks amid that recession.
But the longer-term picture, I think, remains bright for fossil fuels. I think you have continuing demand growth. You have a lack of new supply sources being brought to bear. And I think that’s a recipe for a general trend higher in prices.
Larson – Yeah. Roger, let me ask you about the grid issue. I don’t pretend to be a specialist in utilities, but I do hear people at our conferences and other speakers just note that, you know, for a nation like ours, the grid really isn’t in the kind of shape that you would maybe expect. So, I’m wondering what kind of investments or steps utilities are taking to improve the resiliency of the transmission grid on that side?
Conrad – Well, that’s a very big issue, obviously, with the utilities to ramp up. Basically, it comes down to investment. But I think there are other tools now that they can use to improve resiliency. Artificial Intelligence being one. And in the prevention of wildfires, for example, a couple of California utilities are starting to use that. And we’re seeing other utilities throughout the West looking at that, too.
Obviously, every time there’s a big storm, there are going to be outages. The big one recently was down in Texas with CenterPoint Energy (CNP). They’re kind of in hot water now. Basically, everybody wants to have a scapegoat. If you’re a politician, utilities are very easy because they’re very visible – very easy to blame.
So that’s, of course, the kind of thing that we look out for as investors. But the solution here is actually just getting a lot smarter. A lot of people don’t realize it, but the utility industry was really one of the last to digitize – in other words, for people to look at power lines, collect data in terms of efficiency, really take a look. And a lot of things are now possible that weren’t even five, ten years ago. That’s where you’re going to see a lot of spending going on. In places like Florida, the utilities have had to invest a lot in grid resiliency.
NextEra Energy fared really well a couple of years ago with, I think it was Hurricane Ian, getting things back online. And it was a contrast to some of the others, the co-ops, for example, in the state. They’re a big company. They can move resources around. And they also built these power poles and buried lines and so forth that would be resilient against hurricanes.
So, I think it’s going to come down to a lot of investment. I think some states where the utilities are the subject of lawsuits, like Hawaii, it’s maybe even less certain that that investment is going to happen in a timely way. And there really is a potential for — up here in DC, for example, a company called Pepco, it’s now part of Exelon (EXC), had just a chronic cycle where the utility would underperform in a storm. A lot of outages would take them a while to get things back up. The regulators would punish them, so the utility would invest less. So, the performance in the storms got worse. And the stock didn’t do well. Obviously, the residents didn’t do well. A lot of outages, a lot of money lost, and so forth.
You really have to have an environment where the investment goes in. I do think this is the rule around the country that there’s an understanding, in places at least where the utilities stayed out of the political limelight, that investment is happening. But if you look at that as an investor, it’s actually a big positive because when utilities invest in rate base, that’s what fuels their earnings growth. That’s what fuels their dividend growth over time.
They’re building their assets. And that’s what they earn a return off of. So, I think there’s a lot of opportunity. I do think there’s risk as well, and it’s something that I watch pretty carefully – storm response and wildfire response, increasingly.
Larson – Got it. Elliott, we’ve talked about the big picture here. We kind of laid out some of the broad trends. If you pardon the pun, maybe let’s drill down a little bit here, I’ve got a couple of things. Subsectors, maybe a name or two, that you really like in this environment and lay out your case for them.
Gue – Sure. I think it’s hard to go wrong with the big oil companies. Not the most creative pick, I know, but my favorite is Exxon Mobil. They’re obviously one of the biggest. But I think what’s really interesting is traditionally those big oil companies — the advantage of being big, if you will, is a very low cost of capital.
So, when you have a downturn in the commodity cycle, it allows you to go out and invest in new projects and you can get those developed fairly cheaply, inexpensively. Because negotiating with foreign governments to pay for access to resources is going to be cheaper when commodity prices are low rather than when they’re high – the labor, the resources in terms of services, and whatnot.
Traditionally, those big energy companies have done that during commodity downturns. That did not happen so much in the 2017 to 2020 period. A lot of big oil companies were focused on the energy transition, investing in alternative energy projects and things of the like. Exxon was one of the only ones. I think Chevron (CVX) did to an extent as well. They really invested in bringing new projects on-line.
And as a result, they have a very strong production growth profile over the next few years. In Guyana, in South America, they have one of their leading projects, and also here in the United States, in the Permian Basin where they recently made an acquisition of Pioneer Natural Resources, which has really enhanced their acreage position there.
This is a well that you can make a profit on as long as oil is above $30 or so a barrel. These are long-term, low-cost projects. They can make money in any environment. And because commodity prices have recovered since 2020, whatever they do this year, there’s still a general recovery, right? That’s an avalanche of free cash flow for them.
On the natural gas side – right now, natural gas prices are very depressed in the United States. If you go out and look at — financial media will tell you, “Oh, gas is trading under $2 per million BTUs, which is near multi-year lows, multi-decade lows, all-time lows.” If you’re looking at gas over the last 20-plus years, that’s true. But you got to remember, the gas market is a very seasonal market. The price of gas for delivery in September or October 2024 is rather irrelevant to a gas producer. In most cases, they’ve already hedged the production, the gas they’re going to produce over the next two or three months.
And what really matters is what’s the average price of gas for delivery, say, over the next year or two? And that number is much, much higher than that front month futures price of gas. So, if you look at a producer like Chesapeake Energy (CHK), one of our favorites, they’ve already hedged a lot of their near-term production. They’re facing gas prices, middle/end of next year, in that $3.50 to $4 per million BTU range into 2026 or so. That’s a much more comfortable number for them. They can produce gas profitably at prices sub-three across their acreage. They’re making a lot of money at $3.50 or $4 per million BTUs.
They have access to the two largest gas basins in the United States, the Marcellus of Appalachia, where it’s a little cheaper, and the Haynesville Shale in Louisiana, which, I think, is the key to US liquefied natural gas exports. So, that would be a name to look at.
The last one I’d mention on the pure-energy side would be the services names, Schlumberger (SLB) in particular. Now it’s just called simply SLB. I’m not sure why they changed their name, but they provide a lot of services that oil and gas companies need to produce oil and gas, their base business, everything from seismic data to drilling wells, the actual technical aspects, with drilling directional wells.
And I think that the wave of investment that’s needed to bring new projects on stream and meet the world’s growing energy demand means — that spells revenue. Investment by companies like Exxon or Chevron or BP (BP) or Total, that filters right through to Schlumberger’s bottom line. The stock has not done well lately because it has come down with the rest of the energy space. There are some concerns near-term with spending on oil and gas projects. But I think if you look out over the next three to five years, getting that stock down here in the low-40s is going to look like a very good deal.
Larson – Got it. I asked for one or two. You gave me three!
Gue – Sorry, I got carried away.
Larson – No, that’s great! Roger, I guess I’d ask you the same thing in your sector. Within the utility space, I know there are a lot of different places you can go. What are maybe one or two names that you like? And what is your rationale behind them?
Conrad – Well, as we talked about a minute ago, the utility group has really performed well over the last several months. We try to maintain a pretty disciplined approach about where we tell people to buy individual companies, whereas we had a lot of stocks where I could tell you, you know, this is definitely a table pounding buy if you will. Now I think it’s time to be maybe a little bit cautious.
And in fact, some of the stocks we have — we have in Conrad’s Utility Investor a table where we tell people there are some prices that these stocks reach, take a little bit of money off the table. Don’t sell everything, but maybe take a little bit off. But there are still a few utilities out there, and I intend to focus on these increasingly here in the second half of the year. These are companies that have been left behind for one reason or another.
The utility sector has a pretty much unblemished record of companies getting in trouble, struggling for a while, and then coming back and really rewarding investors who were either patient with them throughout or maybe bought some when the prices were very low.
People tend to — as investors, we tend to impute that a trend is going to remain in motion forever. Whatever’s happening now is always going to be the case. And if you take a long-term look at these utilities, you see that they have advantages that other companies and industries don’t have, such as one just being regulated and dominating an essential service, so they’ve always got kind of a baseline of sales. And basically, what utilities have had to do to recover is basically cut debt, bring their balance sheet in line. Sometimes that has involved cutting dividends, which people don’t like for obvious reasons and I don’t like it, either. There’s also repairing relations with regulators and so on. So companies like that, I think, are — there are still a number of those that are kind of interesting.
One is Dominion Energy (D), which is a utility serving Virginia and also South Carolina. It’s interesting for a number of reasons. But it kind of had a day of reckoning with its regulators. The state of Virginia has kind of flopped around in terms of party control. So, energy policy has been a part of it, that being part of the America we live in today.
One of the legislatures passed, pretty aggressive legislation for a renewable energy buildout, particularly offshore wind, and then there was a change of party control to people that were more skeptical about that plan. So, Dominion has had a pretty good record of dealing with people on both sides of the aisle. I think this was a challenging time for them.
But the long and short of it is they do have an offshore wind project. They’re bringing it on time and budget so far. So, it’s very interesting, and I think that’s pretty much what’s driving the stock. They have basically frozen their dividend in place for the next couple of years, I guess. I think they’re going to beat expectations on that the way things are proceeding.
I also like it because there is a strong nuclear power connection. And just this week, a couple of their — their North Anna plant, their license was extended for 20 years. They’ve talked a lot about SMRs, which are small modular reactors. And then they also own the Summer site in South Carolina, which is the site of a new nuclear project.
Scana, the old company that Dominion bought, abandoned its project where Southern Company went ahead and built the reactors in Georgia, the Vogtle Plant. So, I think that project could potentially be revived. I think Dominion has a strong history operating a nuclear plant. I think nuclear is an area that is going to get a lot more attention going forward because it is base-load power. It’s not intermittent energy. And of course, a lot of people are interested in low carbon and so on. There’s no air pollution, or no air emissions, from those facilities. So, for all those reasons, I think Dominion is interesting.
I will give you one more, and this is more of a contract power company. But I like it for a lot of the same reasons that I like Dominion. It’s called Brookfield Renewable Corporation (BEPC). I think the name renewable is somewhat unfortunate. This year, it’s definitely been a drag on the share price.
A lot of people don’t realize, but even a company like this, which is consistently growing earnings and dividends, has been on the downside for the last four years. So renewable energy under Biden has actually been one of the worst-performing sectors. Oil and gas has been one of the best.
And you can actually reverse those for the previous Trump administration. Renewable energy did very well and oil and gas didn’t. Not because either administration was secretly pro oil and gas or secretly pro wind or anything like that. It’s just that people — investors tend to focus a little bit too much on that one factor, like who’s going to get in, who’s going to be elected, what kind of policy they’re going to follow. And in the case of energy, they just ignored, one, in the case of oil and gas, that we were kind of coming to the end of a down cycle, and then the last four years, we’ve been in the early stages of an up cycle.
And then with renewables, we had a giant bubble right up to that election, and it was burst because, of course, expectations are never met when people are just pouring into something. Brookfield is sort of a boring stock if you look at just the business and so on. But it has just consistently grown dividends, consistently grown earnings, and consistently grown its portfolio by contracting assets not only in the United States, but also around the world.
Again, the name is one of the things holding it back this year. But it’s a tremendous value. And I think eventually, that will be something that is at least not viewed negatively. If it’s perpetually viewed negatively, they can always change the name of the company. But that’s a very strong outfit. It’s the kind of thing that I look for, really kind of a utility-like assets and growth profile.
Larson – Got it. Well, we’re almost at the end of the time that we have here. But I do have to mention, obviously, Roger, you and Elliott are both going to be joining us for the 2024 MoneyShow Orlando.
Could you share just a brief, maybe one- or two-minute summary? What are you guys planning to talk about? And if attendees comes to see you, what are they going to learn about at your presentations?
Conrad – Well, you’re going to learn about energy. Again, like I say, we are looking at this as being the really early stages. We’re a few years in, but still the early stages, of an energy up cycle driven by a chronic lack of investment in energy sources across the board, which to a large extent, all of the stock market has crowded them out. The big seven tech stocks, the seven largest, they’re 30% of the S&P. So, there’s not a lot of room for other sectors. And they’ve been impeded by regulations as well. So, scarcity is another driving factor.
We’re also going to look at all of the above energy sources. You’re going to learn about the best values. You’re going to learn about a lot on the macro side. And I’ll stop talking now and let Elliott jump in.
Gue – I would second all that. One thing I’d say is that over the years, having been following the energy sector closely now for 25 years, one of the things that I always notice is that when we have these general up cycles in energy stocks, people think, “Oh, I should just go out and buy an ETF, an exchange-traded fund that tracks, for example, the S&P 500 Energy Index.”
And that might do okay in years where energy stocks generally do very well. But there is actually a lot of variation. Oftentimes, even in the best years, you’ll have the best-performing stocks of the larger U.S. energy stocks, up triple digits or close to it – and you’ll have the worst performers down or kind of flat.
There are definitely winners and losers in the current market. Some of the hotter energy companies that get touted a lot, I think are either overvalued or potentially dangerous, and vice versa. So, I think one of the things that Roger and I have always focused on across really all of our services is selectivity. Not just buying a basket of four or five big names, or an ETF that mainly owns four or five names, but drilling down in the sector and looking at those phenomenal values deeper into the sector.
Larson – Well, listen, I want to thank you both for your insights.
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