A headspinning start to 2025.  January saw energy roar out of the gates, only to finish the month generally softer than the broad market.  The S&P500 climbed +2.8%, the Nasdaq added +1.7%, while Diversified Energy gained +1.8% (S&P 1500 Energy, S15ENRS) and other energy subsector performance as follows: Midstream +8.8% (AMZ), Upstream +1.4% (XOP), Oilfield Services +2.1% (OIH) and Clean Energy -0.1% (ICLN).  Oil rallied slightly in January, gaining +1.1% (~$72.50/bbl), while Henry Hub natural gas fell -16.2% to close at ~$3.05/mmbtu.⁽¹⁾

In the investing business, there is a phrase called “tape bombs”.  Tape bombs are headlines that appear unexpectedly and cause significant reactions to stocks or markets.  There were dozens of tape bombs in President Trump’s first month in office, many of which impacted energy prices and sentiment.

For oil, the year started bullishly, with prices rallying from ~$72/bbl to just over $80/bbl as the outgoing Biden administration tightened Russian sanctions and rising interest rates had financial players buying crude.  This reversed as the Israel/Gaza peace process de-escalated Middle East tensions and President Trump ramped up commentary about his desire to lower energy prices, including declaring a US energy emergency.  An example of the rhetoric was Trump’s address to the World Economic Forum on January 23rd, where he scolded Saudi Arabia and OPEC+ for allowing prices to be so high.  “You got to bring down the oil price”.

While the President’s commentary is all around lowering energy prices, Presidential actions to-date are more likely to bias prices to the upside.  Threatened tariffs on Mexico and Canada would have added to the cost of imported oil.  While the US is a net exporter, it still imports 4.6mmbopd from Canada and 600kbbls/day from Mexico.  NYMEX futures immediately ticked up when sanctions were announced.  Refilling the SPR is also a stated objective – which would add to demand.  The (welcomed) removal of restrictions on the LNG permit process should make it easier to export US natural gas – adding to gas demand.  Drill, Baby, Drill is another Presidential catchphrase, but one that almost everyone expects to fall on deaf ears within the industry.

We don’t doubt President Trump's desire to tame/reduce inflation, with energy as one key focus area.  Therefore, we must look to foreign policy as a potential lever.  There, tougher Iranian sanctions appear to be a near-term likelihood.  Squeezing Iran means lower Iranian oil exports (currently at ~1.5mmbopd, mostly to China).  The standalone impact of this move would be for higher global oil prices, so the logical accompanying strategy is for increased production from OPEC+ (which the cartel would welcome).  We expect little net impact to crude price as offsetting Iran’s exports could be accomplished with only half of OPEC+’s current shut-in capacity.

The President’s first month in office has convinced us that energy-influencing tape bombs will probably keep coming.  With oil supply/demand delicately balanced to oversupplied, heightened event risk is unwelcome.  We have reduced our risk exposure accordingly.  The next year is going to be fascinating, but a hard one to predict and navigate for the energy industry and energy investors. (Sidenote, we refuse to call the Gulf of Mexico the Gulf of America!)

Turning to natural gas, Chinese AI firm DeepSeek delivered a catalyst for investors to see how much AI enthusiasm had been built into gas markets.  DeepSeek spooked the world with the potential for AI models requiring less sophisticated computer chips and less energy.  Front month natty fell -8% on DeepSeek Monday (January 27th), while natural gas E&Ps declined 2-10% and natural gas power plant plays dropped 20%+.  We have maintained that near-term AI-driven demand for natural gas has been overstated and overhyped.  It’s too early to know exactly how much the forward outlook for AI power demand has changed, but the DeepSeek announcement is resetting expectations to a more reasonable (and much lower) level for 2025 and 2026.  Ironically, this makes us more bullish as it refocuses attention on the bullish supply/demand dynamic setting up as LNG exports ramp into 2026.

The industry was quite active in January.  In midstream, several pipeline assets moved into the hands of large, public players.  Kinder Morgan bought gas gathering and processing in the Bakken ($640MM deal), while Phillips 66 acquired EagleFord and Permian NGL systems from EPIC.  In power, the blockbuster deal was the ~$25B combination between utility Constellation Energy (symbol CEG) and private Calpine.  This pulled together Constellation’s nuclear fleet with Calpine’s gas-fired power generation.  The stock market loved the deal, with a view the combined company would be able to deliver power to the exploding AI datacenter market in both the near/intermediate term (gas-fired) and the longer term (nuclear).  CEG rallied +25% on the day of the announcement and is currently up +29% even with the DeepSeek selloff in late January.  Upstream consolidation has been quiet for the past few months, partially a reflection of the significant deal activity during 2024.  However, we’d expect continued consolidation in the space.  Small/midcap publics are still eager to bulk up in terms of market cap/investor relevance.  Gassy transactions are also more palatable now that gas prices have improved.

Energy IPO markets were active during January.  Given the significant number of public companies that have been consolidated away over the past several years, investors are understandably receptive to new ideas.  The largest IPO of the year (in any sector) came via LNG-player Venture Global (symbol VG).  The deal raised ~$1.8B, but was a textbook case of how not to execute a public offering.  The initial price range of $40-$46 was wildly aggressive at a substantial valuation premium to established LNG competitor Cheniere (and an absolute valuation of over $100B).  The ~40% reduction to the price range ($23-$27) spooked many investors, resulting in a lackluster perception and reception.  The IPO was priced at $25, closed its first day at $24 (-4%) and traded ~$20/share at the end of January.  By contrast, $2B OFS provider Flowco Holdings (symbol FLOC), was very well received.  Investors were intrigued by the company’s production-focused revenue stream, pricing the deal at $24 (above the $21-$23 range) and driving a +24% pop on the first trading day.  Meanwhile, $1B Appalachia-focused E&P Infinity Natural Resources also had a good debut, trading +5% on its first day as a public company.

While the stock market has welcomed new energy companies, the overall energy sector continues to struggle for investor mindshare.  Energy was the best group in the market for a few weeks in early January on higher oil prices and inflation fears, but couldn’t hold the momentum.  The XLE finished the month below the S&P500 (+2.3% vs. +2.8%, respectively).  Energy-related tape bombs and a mediocre 2025 crude outlook translate to a stock market knife-fight…but it is a fight worth having as value is solid.  We continue to emphasize picking spots and picking companies versus blanket optimism.

(1) Bloomberg