By: Avi Salzman – Barrons – Oil and gas stocks would almost certainly be better off under four more years of President Donald Trump. But a Joe Biden presidency doesn’t mean the industry is doomed.
The clearest evidence of that is in the industry’s surge on Monday and Tuesday on positive vaccine news. Energy, like many other industries, is much more dependent on the global economy rebounding from Covid-19 than on federal policy right now. Oil analysts at J.P. Morgan have been projecting that “aside from short-term volatility, the electoral outcome was not particularly relevant for oil prices in 2021.”
Overall, the impact of the election is probably a slight drag on crude prices, argues Rebecca Babin, senior energy trader at CIBC Private Wealth Management. That’s particularly true if Congress remains split, and President-Elect Biden can’t pass his proposed $2 trillion climate change package.
“The impact of a Biden Presidency and Republican Senate at face value is modestly negative for crude in the short term as it reduces the size of potential stimulus and increases the odds of Iranian barrels hitting the market in 2021,” she wrote, referring to the deal signed by President Barack Obama that withdrew certain sanctions on Iran as long as that country stopped enriching uranium to weapons-grade levels.
Trump pulled out of the agreement, and the resulting sanctions have reduced Iran’s oil exports. If Biden reverses that decision, Iran could add millions of barrels of oil to global supplies, depressing prices. In any case, a change in Iran relations probably wouldn’t impact the oil market for at least a year. S&P Global Platt’s doesn’t expect a return of Iranian oil until 2022 if Biden rejoins the deal.
On the domestic front, Biden’s energy plans could have an impact too. His policy on oil exploration became a point of conflict toward the end of the campaign, as Trump claimed his opponent would ban hydraulic fracturing, or fracking, a technique to extract oil and gas from shale.
Biden denied that he would ban fracking, and the energy plan posted on his campaign site made it clear that he instead plans to stop issuing new fracking leases on federal land. That would impact less than 10% of potential oil production. If extended to leases in the Gulf of Mexico, it could have a larger impact—perhaps curtailing as much as 25% of future production.
Any ban is likely to affect a few companies with high federal land exposure, including EOG Resources (ticker: EOG). EOG CEO William Thomas said in September that “less than 50%” of its 2020 capital budget was on federal land, and argued that “our stock has been in undue pressure because of the federal acreage issue, I think it’s discounted too heavily.” EOG’s current leases wouldn’t be impacted by Biden’s plans.
Biden is also likely to impose stricter limits on methane, a greenhouse gas emitted during natural gas and oil production. Trump had overturned Obama-era limits on methane emissions, but Jen Snyder, a director at energy intelligence firm Enverus, expects Biden to quickly restore them. She doesn’t expect that to be a negative for major producers because the better ones know how to control methane emissions.
“We think that could be a positive in that it does support more responsible operations for oil and gas producers,” she said in a postelection conference call this week. “It’s manageable. The costs are manageable. It’s kind of been a bit of a black eye on the industry.”
Biden has also pledged to rejoin the Paris climate agreement, but most analysts doubt that will have real policy implications absent other legislation. His climate-change plan would put more government funding behind renewables, and help domestic manufacturers of climate-friendly products. J.P. Morgan analyst Joseph Osha highlights solar-panel maker First Solar (FSLR), lighting company Cree (CREE), wind-blade manufacturer TPI Composites (TPIC), and generator-maker Generac Holdings (GNRC) as beneficiaries.
The Biden campaign didn’t respond to a request for more information on the former vice president’s energy policy.
One big question for the next few years is whether Biden and the Democrats embrace natural gas as a kind of bridge fuel between coal and the eventual ascendancy of wind and solar power. Renewables have made enormous strides in the past few years, but natural gas may be necessary to provide reliable power in the interim before a fully renewable electricity grid is possible.
The fate of gas producers like EQT (EQT) and Cabot Oil & Gas (COG) will depend on how policy makers treat natural gas over the next decade—as a crucial and somewhat less-polluting fuel or as another dangerous carbon-emitter that should be eliminated quickly.
Snyder said she hopes that Biden realizes natural gas is “a low-cost solution now” and “a real good partner for renewables.”
“We hope that the pragmatic side of this pairing of possibly a red Senate and a Biden administration brings that pragmatism to the floor,” she said. “Gas offers a ton over the next few years in terms of meeting those goals.”