December 2023 – Commentary from Dan Pickering

December went out with a bang in the overall market, but a whimper for conventional energy.

Traditional Energy Monthly Commentary

Hello 2024! December went out with a bang in the overall market, but a whimper for conventional energy. The S&P500 gained +4.5%, the Nasdaq Composite rallied +5.6% while Diversified Energy (S&P 1500 Energy, S15ENRS) was dead flat with subsector performance as follows - Oilfield Services +0.5% (OIH), Upstream/E&P flat (XOP), Midstream -2.2% (AMZ), and Clean Energy +10.5% (ICLN). For 2023, the energy benchmark was -0.7% against gangbuster broad market indices (+26.3% S&P500 and +44.7% Nasdaq). Subsector performance was wide, with Midstream +26.3%, Oilfield Services +3.2%, Upstream E&P +3.5% and Clean Energy −20.4% . WTI finished the year at $71.65/bbl (-5.7% m/m and -10.7% y/y). Natural gas ended 2023 at ~$2.50/mcf (-10.3% m/m and -44% y/y).(1)

Looking in the rearview mirror, the clear energy surprise for 2023 was the growth in US and global oil supply. US production exited the year at ~13.3mmbopd, up +1mmbopd y/y compared to initial expectations of +300-500kbbls/day. Global supply gains came from the US, Guyana, Brazil and a smattering of other countries, with OPEC managing the market via a series of Saudi-led cuts. Inventories are at the lower end of the 5-year range.

Looking ahead, we see 2024 as a slog for energy markets.


  • Demand expectations will oscillate between nervous (global economic slowdown) and OK (soft landing). We are not willing to have a goldilocks global soft landing as our base case scenario. As such, we think demand growth for 2024 is in the +1% range (~1mmbopd) and leaves little room for OPEC to return sidelined barrels to the market.  
  • Oil supply growth will moderate as 2024 global upstream spending budgets will likely be set with $70/bbl WTI oil pricing (down y/y) and US shale economics are more challenged (fewer drilled-and-uncompleted wells, plateauing inventory quality at any given price level). We see non-OPEC supply growing ~1mmbopd with most of this growth outside the US.
  • OPEC enters the year as a fraying cartel, in our opinion. Saudi Arabia has carried most of the load from a production cut perspective, but probably can’t stomach additional cuts from their current 9mmbopd (-2mmbopd of cuts). The rest of OPEC is in quibble mode, as evidenced by the sloppy November 2023 meeting/outcome. IF additional cuts are required in 2024, it isn’t clear that OPEC can deliver decisively, which is the equivalent of blood-in-the-water for oil traders.
  • Meanwhile, conflict rages throughout the world. Supply impacts have been minimal so far. Russia continues to find buyers for its oil (primarily India and China) and international sanctions have been relatively toothless in restricting Russian supply. We expect deterioration in Russia’s productive capacity to happen over the next 5 years, but this will be a slow process unlikely to materially impact Russia’s 2024 capabilities. In the Middle East, the Israel/Hamas conflict has not waned, and Iran has stepped up its proxy attacks in the region, most recently with Houthi interference in Red Sea shipping lanes. Barrels continue to flow…for now.
  • US election year dynamics make it unlikely we’ll see policy “support” for energy – the incumbent Biden administration has every incentive to keep retail gasoline prices low as November 2024 approaches. Tougher Iranian sanctions? Only if Iran’s proxy actions in the Israel/Hamas conflict become unavoidably blatant. Tougher Russian sanctions? Why now if they haven’t stepped up already? If oil prices take another leg down into the low/mid-$60’s, perhaps we’d see a more meaningful effort to refill the Strategic Petroleum Reserve (supporting demand/price). However, a lot of damage will be done to the energy industry and energy investor psyche in this scenario.

OK, OK, thanks for the analysis, but what’s it mean for WTI oil price? By falling to and languishing around $70/bbl from September 2023’s $95/bbl level, oil markets have clearly decided that price risks are skewed to the downside. Longer-dated 2025 crude has fallen from $76/bbl to the high $60’s in the same time frame, a -10% correction vs. the spot market pullback of 20-25%. In our opinion, these corrections adequately reflect the “sloggy” environment we outlined above.

We haven’t adjusted our $80/bbl price expectations through 2027, but 2024 feels like a year where the commodity spends more time below the average than above it. Call it a $65-$85/bbl range with lots of time in the low $70’s. The $100+/bbl upside price spike some were predicting only a few months ago seems likely only in a dramatically escalating Middle East war scenario. Now also feels like an appropriate time to add the caveat that price forecasting is a thankless and impossible task, which is why a constantly watchful eye and willingness to adapt to the data/circumstances is a must in the energy game.


  • For most of 2023, US gas producers have seen 2024 as a “bridge year” toward robust gas markets in 2025+. New LNG projects in late 2024/early 2025 are expected to add almost 7bcf/day of incremental demand, while calendar 2025 gas prices traded at $4+/mmbtu as recently as early November. Thus, gas producers have been willing to look through mediocre near-term pricing given the siren’s call of better days ahead.
  • This outlook and approach took a kick in the teeth in November/December 2023 as the winter started off much warmer than normal (negatively influencing near term demand) and Exxon delayed its 2.4bcf/day Golden Pass LNG startup from late 2023 into 1H 2024.
  • Less demand on two fronts created an immediate price reaction. Front month prices have fallen -25% from ~$3.50/mmbtu to ~$2.60/mmbtu, while the likelihood of high storage levels have also dampened 2024 calendar pricing (falling ~20% from the $3.60/mmbtu level to ~$2.80/mmbtu). The 2025 NYMEX strip has also corrected ~15% to ~3.55/mcf.
  • Now all eyes turn to drilling activity. Sentiment on 2024 has clearly soured. Although more LNG slippage is likely, the 2025+ thesis remains intact. However, current spot and 2024 calendar prices generate mediocre cash flows and drilling economics. We don’t think public company investors are ready/willing to see gassy E&Ps outspend cash flows. Nor are management teams ready to bite that bullet. This argues for lower 1H 2024 drilling activity, falling US production (watch the Haynesville closely) and a better setup leading into 2025.
  • Thus, just like oil, 2024 for US natural gas feels like a journeyman year at $2.50-$3/mcf where the commodity is (barely) adequate but far from stellar.


  • For oil and gas players, 2024 will be a Year of Execution. Prices (particularly relative to go-forward drilling economics) are likely to be ho-hum. However, cash flows will be decent and balance sheets are rock solid. Keeping “the machine” running efficiently will be the name of the game in the energy patch.
  • Capital discipline, low debt levels, dividends, share repurchase and return of capital will all be repeat strategies for the industry in 2024. If it ain’t broke, don’t fix it. Critically, investors are nowhere close to endorsing any business strategy other than the current one, so perhaps a better analogy is “if it ain’t broke, don’t break it”.
  • We also expect another Year of Consolidation, particularly in Upstream. Four things will continue to drive the ongoing wave of M&A. Desire for 1) inventory, 2) scale, 3) size and 4) value.

-   Size is another word for investor relevancy. With energy companies competing for investor attention, being small is a notable disadvantage. In today’s market, larger companies carry higher valuations and therefore a lower cost of capital. Energy is a capital intensive, commodity business where cost of capital matters a lot. We acknowledge that bigger does not always mean better. But losing a little in the “better” category while gaining a lot in the “relevancy” category can translate to meaningful incremental value to shareholders. Mergers will continue to help the acquirers gain Size.

-   Scale is another variant of size, but in this context it is more operational, referring to the ability to increase efficiency and profitability. In a world where investors are punishing companies for volumetric growth, companies want to find a way to drive higher earnings. M&A helps achieve this. Buy, combine, reduce operating costs, increase financial results. Mergers will continue to help the acquirers gain Scale.

-   Inventory is the lifeblood of an upstream company. Fifteen years into the shale boom, the industry has chewed through its highest quality drilling locations and technology improvements are plateauing (slowing the upgrading of prospect quality). Replenishing inventory comes from exploration, organic leasing or acquisition. Exploration is a lost art in the shale game, organic leasing is almost impossible at size (virtually all quality acreage is already owned), which leaves acquisition as the primary vehicle to increase inventory. One needs only to look at the Permian Basin and the 15+ multibillion-dollar acquisitions made during 2023 to see that acquisition is the preferred weapon of choice.

-   Value. Most oilpatch deals are currently being done between 4-6x EV/EBITDA assuming oil price in the $65-$75/bbl range. If one believes in any of the benefits listed above (size, scale, inventory) or has an upside forecast on oil price, these values look quite attractive. The market has not (yet) rewarded recent acquirors like Exxon and Chevron, but history is likely to show that deals done in the 2023-2024 time frame were attractive and value-enhancing.


  • Investing is always an intricate stew where the recipe involves both quantitative and qualitative assessment of the macro and micro environment and the ingredients include valuation, sentiment, positioning, and momentum to name just a few. For energy, with the setup described above, it is going to be a Year of Stockpicking.
  • The energy macro is going to be a slog. Commodity prices should be acceptable but not remarkable. The eyes of the market are looking elsewhere, particularly given the anticipation of interest rate cuts later in the year. Evercore’s macro strategist Julian Emanuel had a great chart in his December 13th research piece entitled Even Goldilocks Loves Defense. It showed the performance over the past 50 years of the 12 S&P500 sectors from the last interest rate hike to the first interest rate cut. Energy was at the bottom of the pack, outperforming only Real Estate. Energy’s lag vs. the market since November is not surprising given this historical relationship. Furthermore, if consensus is right and rate cuts are on the 1H 2024 horizon, energy is facing a headwind.  
  • We maintain our view that the energy sector is in an upcycle that began in 2021 and will run through at least 2027. However, that doesn’t necessarily mean we’re going to get paid ratably over that time frame. 2021 and 2022 saw energy as the best performing group in the market with absolute performance of +54.9% and +63.5 %, respectively and relative outperformance of +2,624bps and +8,166bps. 2023 was a nothingburger at -0.7% absolute and -27% relative. We are staring uphill as we begin 2024, but there will always be pockets of opportunity (this is an energy investor job security statement that also happens to be 100% true!)
  • Value within the sector is attractive. In the current market environment, value is not a reason for stocks to go up, but it can be a reason for investors to stay patient/interested. Exxon (symbol XOM) trades at an 11x 2024 P/E and has 3.7% dividend yield. The new crown jewel of standalone Permian Basin E&P companies, Diamondback Energy (symbol FANG), trades at 5x EV/EBITDA and has a 6% dividend yield. The list could go on and on and on and on.
  • For those thinking the energy sector should be ignored in 2024, we urge you to at least keep an eye on the screen or a toe in the water. The macro dynamics might change, particularly on the interest rate front. There could be a price-induced hiccup that generates great value. There could be a geopolitical event that shifts the playing field. It is worth noting that energy was the victim of a 2023 market that was all-tech-all-the-time. So far in 2024, tech is down and energy is up. If the market zigs, energy could zag. That alone is a reason to pay attention.

Decarbonization / Energy Transition Quarterly Commentary

Q4 was another volatile quarter for clean energy, but this one finished in the green (pun intended). Q4 saw gains of +11.7% for the S&P500, +13.8% for the Nasdaq Composite and +7.4% for the iShares Global Clean Energy ETF (ICLN). Charles Dickens is alive and well on a 2023 yearly basis as it was the best of times for the broad markets (S&P500 +26.3%, Nasdaq +44.7%) and the worst of times for energy transition (-20.4% ICLN).(1)

Sticking with the Dickens theme, Q4 was a tale of two cities. October continued clean energy’s downward spiral as the combination of rising rates and poor fundamentals generated losses of -11% for the benchmark ICLN index. Solar was particularly hard hit as residential suffered from rate-induced demand slowdown, while industrial battled a glut of panel and inverter inventory as demand also slowed. November and December saw a healthy ICLN bounce of +9.2% and +10.5% from oversold conditions as consensus around interest rates shifted more dovish. There is still more wood to chop before the sector is out of the woods, but the lows have likely been seen during the panic moments of Q4.

Given a much tougher and discerning capital market environment, the Haves and Have Nots of the clean energy space are emerging. The “Have” category is being delineated by companies with profitable business models or balance sheets with ample runway to absorb near-term cash burns. The “Have Not” category contains companies with nascent technologies, cash-burning business models with relatively near-term capital needs, or both. Neither category was embraced by the market in 2023, but companies in the Have Not category now face significant challenges/dilution in their quest for life-sustaining capital. For example, in early December, EV and hydrogen truck maker Nikola (symbol NKLA) took a -27% one-day hit to raise ~$100MM of new equity. With the cost of staying in business somewhere between very high and infinite, the timeline for a company to reach sustainability is now much more sobering.

Notable Q4 items:

  • COP28 results in a historic declaration to transition away from fossil fuels. A gazillion people gathered in the UAE to plot the course of decarbonization. They walked away with the first ever commitment to “transition away from fossil fuels in a just, orderly and equitable manner”, along with a call to triple renewable energy and double energy efficiency by 2030. Although these goals are overly ambitious and unlikely to be accomplished in the targeted time frame, it is absolutely a high-level signal that must be respected. Government commitment to decarbonize and to invest in clean energy is up and to the right for the foreseeable future.
  • Cancellation of the Navigator pipeline. This project was being developed to gather CO2 from Midwest grain belt ethanol plants and sequester it in Illinois but fell victim to NIMBYism and difficulty in getting necessary permits. Summit Agriculture’s competing project targeting CCUS in North Dakota has faced similar challenges but continues to move ahead.
  • Lithium pricing groping for a bottom. Down 80% from early 2023 highs, lithium spot prices appear to have stabilized. Additional supply has entered the market and the frenzied sentiment around EVs/batteries has dampened. Pricing for term contracts did not rise as much or fall as hard and is reflective of ongoing demand growth.
  • Air Products and AES launching a US green hydrogen project. It’s a big one – A targeted $4B investment in a newbuild Texas facility to deliver 200mtpa (metric tons per annum) of green hydrogen with a startup in 2027. AES brings the renewable power experience, Air Products brings the industrial gases experience. Together they are making a big bet on “mobility and industrial uses” for hydrogen. We haven’t yet seen the unit economics for production from the facility (either before or after IRA incentives) which will obviously be a key variable in the long-term attractiveness of this project.  
  • State of Louisiana granted primacy in carbon sequestration process. Score one for the good guys. In a positive development for carbon capture, utilization and sequestration (CCUS), the US Environmental Protection Agency granted primacy to the state of Louisiana regarding approval for Class VI injection wells. Class VI injection wells are a cornerstone of CCUS projects. With decision making now resting at the Louisiana state level, permit approvals for Louisiana CCUS projects will likely move much faster.
  • Research analysts dropping coverage. From a contrarian perspective, this is an encouraging sign. Abysmal stock performance and shrinking market caps have resulted in discontinued research coverage from several sellside shops. This is done because of a lack of interest from buyside clients and/or the unwillingness of the research firms to allocate valuable time/effort. Either way, it represents the type of give up that we look for in a bottoming subsector.

Overall, our thematic TE&M (Technology, Energy & Mobility) views are driven by the combination of supply/demand dynamics, the status of technology development and stock/sector valuation. We are more constructive on wind/solar following the dramatic downdraft of the sector and the increased likelihood of a lower interest rate environment. Therefore, we see the following subsectors as interesting on the long side: energy storage, carbon capture, enabling commodities, decarbonization equipment and services, wind/solar and special situations. On the avoid/short side: electric vehicle industry, hydrogen.

Although the preponderance of news flow and stock action in the clean energy sector has been negative, we don’t want to overlook the ongoing secular theme. Decarbonization remains a juggernaut. The COP28 forum reinforces this at a high level. There will be cyclicality around private market capital availability and the value/valuation of clean energy companies, but a decarbonization megatrend underlies the volatility.

Please remember the PEP organization is standing by to help – whether it be investment exposure, capital needs, energy market intelligence or help with a specific problem. As always, we appreciate your interest and welcome your questions. Onward into 2024!

(1)  Source: Bloomberg