Watching the Rex Tillerson confirmation hearings, I’m wondering how his move as the head of the State department, should he be confirmed, would impact oil and gas stocks. There’s a lot there to be considered.
The most obvious initial impact could be with Exxon-Mobil (XOM) itself. It’s not just in the psychological buying that would likely come into the market with the Ex-CEO becoming Secretary of State, it is the possibility of the reduction or outright complete rollback of Russian sanctions. Those sanctions have been the lone blockade to a half a trillion (yes, trillion) dollar potential of Russian oil development with which Exxon has a partnership agreement.
And while the immediate rollback of sanctions would look completely and transparently for the benefit of Russia and Exxon and likely to get scrutinized, I fully expect it to happen.
But let’s go a bit beyond the benefits to Exxon and Russia.
Here in the U.S., there have been several Trump statements on the campaign trail to ‘unleash U.S. energy potential’ and besides some obvious ideas of further opening up Federal lands for drilling or somehow increasing U.S. reliance on coal, there is one idea that might get us in front of a trend and make us some money.
Infrastructure bottlenecks that have plagued the natural gas industry for the past several years, but also oil takeaway as well. Basis price differentials in oil have helped keep Bakken producers at a disadvantage, while helping those in the Eagle Ford and Permian regions of Texas. In natural gas, the lack of a fully capable pipeline network in the Marcellus has further depressed prices that producers have been able to secure, as they’ve been locally glutted, while markets even as close as Cincinnati and Chicago have been largely unreachable.
Trump can do several things to fix that. Largely through tax incentives, he can revitalize the master limited partnership structure that has seemed to have been on its last legs in the last year and a half, pushing a new rush to increase pipeline capacity towards less serviced customer areas. He can also enhance the tax-advantaged distribution structures that many MLP’s share. He can defer taxes for newly built pipelines and also lessen or defer taxes of those new producers who contract to use those pipes in the first years of their operation.
Even small changes to the tax code could have big impacts to the pipeline network here in the U.S., and I expected at least some of those changes to be pushed – after all, Trump has filled his cabinet and advisory roles with oil-savvy men and bankers – the two together surely know how to move oil and gas development forward.
Despite the likelihood of several Federal Reserve rate increases in the next two years, and the negative effect that normally has on high distribution stocks like MLP’s, I am still looking favorably at a few of these stocks – but only a few.
I’m particularly drawn to the less leveraged and highly capitalized pipeline companies who will be best equipped to take advantage of the expansionary period for pipelines that I think is coming. Two of the best that come to mind are two of the largest: Plains All-American (PAA) and Enterprise Product Partners (EPD). Both carry distributions above 6%.
The most obvious plays into the incoming, oil-friendly, Trump administration are oil and gas companies. But don’t discount those equally important companies that take production away: The pipelines. The opportunities should extend to them as well, despite other negatives, like rising interest rates.