Yesterday, I discussed the near-certainty that Donald Trump will be back in the Oval Office next year.
Who knows. The Democrats might still have an “October surprise” up their sleeves. But I think the July shock of Trump surviving an assassination attempt – on top of Biden’s poor debate performance weeks prior – is just too powerful.
I don’t have a crystal ball, of course. But right now, expecting Trump to win out seems about as safe an opportunity as an investor can get.
In which case, there are certain sectors we should consider. And as I wrote yesterday, that includes energy.
What a Second Trump Term Means for Energy
Trump is already promoting the goal of becoming “energy independent and even dominant again,” to quote the 2024 Republican Party Platform page… complete with the phrase “drill, baby, drill.”
This stance shouldn’t come as a surprise considering Trump’s first administration, where he streamlined the liquid natural gas (LNG) terminal permitting process…
Opened up new leases in Alaska…
Approved the Dakota Access Pipeline…
Advanced the Keystone XL Pipeline (which Biden then terminated on day one of his own term)…
And rescinded a number of regulations around energy extraction.
It’s safe to expect some changes to America’s energy policies starting on January 20, 2025. And I, for one, am looking forward to it.
With that said, here’s another thing I mentioned yesterday: This doesn’t mean you should buy oil and gas stocks blindly.
There are nuances involved here that will likely mean some stocks see meaningful long-term profits while others produce market-lagging results.
Big Oil Might Lose Some Steam in the Years to Come
Remember how much lower gasoline was during Trump’s tenure?
I’m not even talking about 2020. That was an obvious outlier he can’t take credit for. But between 2017 and 2019, the U.S. national average was well under $3 per gallon.
That’s because his pro-oil positions were meant to bring the cost of the commodity down. This greatly benefitted consumers everywhere, but it affected energy businesses in different ways depending on what they do and how they do it.
Take companies that extract fossil fuels. They actually like it when prices go up.
This only makes sense when you really think about it since oil is a necessity to our way of life. It’s not just cars, trucks, trains, and planes that rely on this kind of fuel to function. The commodity is also necessary for:
- Heating and electricity generation
- Asphalt
- Plastics
- Chemical compositions
- Synthetic materials
Global consumers can cut back on those products, but only by so much.
This puts the supply and demand story in big oil’s favor, with the consumer losing out the higher prices go.
That’s why putting an embargo on Russian energy in 2022 was such a mistake. All it did was increase energy prices, thus making Russian energy exports more profitable.
Ever wonder why those companies doubled their revenue and increased profitability in 2022?
Now you know.
Conversely, under Trump’s fossil-fuel-friendly policies, energy was the second-worst-performing S&P sector in 2017. And it was the absolute worst in both 2018 and 2019.
All this to explain why I’m looking outside of big oil to park my money. I just don’t expect the biggest profits possible from exploration and production, or “upstream” segments of the industry under a MAGA agenda.
But that’s not to say the entire sector is doomed to lackluster profits in 2025 and beyond. The years ahead could turn out to be wonderful news for midstream companies.
A “Tollbooth” Worth Talking About
Midstream energy businesses, for those of you who don’t know, are often referred to as pipeline companies. They move energy commodities from point A to point B while also processing, storing, and preparing them for shipment.
These companies act a bit like tollbooths, collecting fees as commodities flow through the infrastructure they own and operate. So, if “traffic” were to increase, so would “toll” collections.
See where I’m going with this?
Oil and gas pipelines are a capital-intensive business, as you might imagine. So, these companies aren’t known for massive capital gains. They’re usually more modest in this regard, which tends to lead to more slow and steady stock price appreciation.
Even so, there’s a lot for investors to like.
For one thing, I’ll take the diminished drama of slow and steady profits over the fast, furious, and unreliable any day. And that’s to say nothing of midstream dividends.
Most of these companies, you see, are legally set up as master limited partnerships (MLPs). And like the real estate investment trusts (REITs) I specialize in, MLPs have to pay out at least 90% of their taxable profits to shareholders.
That means they tend to offer higher yields than the average dividend-paying company… which means more money for you to accumulate as you see fit.
(Personally, I like reinvesting them to purchase more shares and, therefore, generate even more dividends. But I understand not everyone’s in that position, so to each their own.)
There are several viable midstream options, but I’m going to single out Enbridge Inc (ENB). It’s the largest of its kind in North America and an impressive operation on multiple levels.
Management encourages consistently increasing cash flows, as evidenced by its 69-year history of dividend payments. Moreover, it’s raised that payout every year for the past 29 years – at an average compound annual growth rate of 10%.
As I write today, ENB’s yield is even more attractive at 7.5%. Thanks in part to current energy policies, midstreams in general are devalued. The market just doesn’t see anything special in them.
Again, though, a Trump win at the ballot box this year could change that game intensely.
I’m not saying we’ll see single-day gains of 20% in Enbridge’s stock price. But I am saying the combination of its unappreciated current cost… its subsequently elevated dividend yield… and its outlook under pro-fossil fuel policies is compelling.
Far too much so not to tell you about.
Regards,
Brad Thomas
Editor, Intelligent Income Daily
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Source: Wide Moat Research