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Thankful to be turning the page to a new year. December was a weak finish for the market and for energy. The S&P500 fell -2.4%, the Nasdaq added +0.6%, while energy notably underperformed with Diversified Energy -9.2% (S&P 1500 Energy, S15ENRS) and other energy subsector performance as follows: Midstream -7.2% (AMZ), Upstream -8.4% (XOP), Oilfield Services -8.7% (OIH) and Clean Energy -7.3% (ICLN). Oil rallied in December, gaining +5.5% (~$71.70/bbl), while Henry Hub natural gas tacked on another +8.0% to close at ~$3.65/mmbtu.(1)
The year ended much as it began. Energy companies enjoyed decent oil prices, anticipated better natural gas prices and were generally very disciplined with capital. Meanwhile, investors yawned or ignored the sector. A little gleam of light crept into the picture in the final few days of the year, as cold weather forecasts spiked natural gas prices close to $4/mmbtu and floundering tech stocks allowed rotation into the energy sector. This created 300bps of energy outperformance in two days, a trend which continued early in January. The stock market gods are showing us the playbook. These exact conditions are what will be required for energy to climb out of the doghouse in 2025.
December’s biggest macro event was US Federal Reserve Chairman Powell’s commentary implying US interest rates will come down less than previously expected. Normally, hawkish commentary would be bullish for the energy sector, but with balanced-to-oversupplied crude markets, energy commodities are unlikely to be the inflationary culprit in 2025.
Energy news was relatively sparse in December. Shell and Equinor announced the combination of their UK North Sea assets – seeking to garner efficiencies and lower costs in a basin that has become irrelevant on a global scale following 2022’s windfall profits taxes which have eviscerated profitability and killed interest in deploying North Sea capital. OPEC+ pushed its proposed production hike out through Q1 2025. Barring some sort of geopolitical event such as tougher Iranian sanctions by the US, we suspect OPEC+ will remain sidelined through all of 2025. Our view remains $65-$75/bbl WTI in 2025, with more downside risk than upside opportunity. Our longer-term $80/bbl WTI average through 2027 is unchanged.
On the natural gas front, late in December, Venture Global made headlines with two events. One was the start-up of its Plaquemines LNG export facility, while the other was filing for a ~$3B IPO. Cheniere also announced the start-up (ahead of schedule) for its Corpus Christi Stage 3 LNG project. Gas markets have been eagerly awaiting the demand associated with incremental LNG exports. December’s news happened to coincide with forecasts of an impending polar vortex weather system. From ~$3.20/mmbtu in mid-December, front month natty jumped over +20% to ~$3.95/mmbtu by Christmas Eve. The full year 2025 forward curve jumped a more modest +9% to ~$3.50/mmbtu. Both front month and full year 2025 prices have taken a breather in early January, but gas bulls are understandably excited for 2025. From our perspective, weather always matters and LNG start-up timing remains critical. We are modeling a 2025 average price of $3-$3.50/mmbtu, with expectations of high volatility.
Coming out of covid, energy stocks outperformed the S&P500 dramatically in 2021 (by +2,560bps) and 2022 (by +8,200bps). The most recent two years were marked by dramatic underperformance, 2023 (-2,700bps) and 2024 (-1,890bps). Will there be a three-peat energy lag? As we look to 2025, oil fundamentals (x-geopolitical events) are mediocre, US gas looks solid, power is enjoying a renaissance and traditional hydrocarbons won’t be demonized by the incoming US Administration. It feels like energy volatility could be quite high (translation – scary for many/most). Energy value/valuation is attractive (at ~13x 2025 P/E, XOM trades at 60% of the S&P500 multiple), but value hasn’t been a catalyst for the past few years. The roadmap for energy success in 2025 has been laid on the hood of the car over the first few days of the year – the economy can’t fail, oil can’t turf and technology stocks must relinquish their stranglehold on investor mindshare. This is a tough needle to thread; it is possible, but is it probable? Openness to the data/information flow, nimbleness and stockpicking will be key ingredients for success in 2025 energy investing.
(1) Bloomberg
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