Will Energy be the Story of the Summer?

Let's start macro and I know Robert, you've got some ideas. And when we say energy, we are not just talking about oil and gas because you like some other sectors as well. But the first thing I want to do is talk about the macro. Halima, you have been working overtime lately, you and your team, because not only do we have a lot of movement around Iran, a lot of concern there, We got grilling in Congress about sanctions or lack thereof. We've got now this potential investigation by Democrats in the US Congress against U.S. oil companies and OPEC. And whether or not everybody's colluding with each other. What is your macro take on where the price of oil and oil and gas may go and what are the key things that would impact those prices down the line? I mean, Brian, we think the market right now is basically stuck in a range for oil prices. We see that Brent prices will likely average around $84 for the remainder of the year, WTI prices 7950. We are not in an undersupplied situation in the market right now. We have plenty of light sweet barrels on the market, less so the heavier sour barrels. We look at the products picture, demand for diesel not looking terribly robust, but gasoline demand is holding up and we are going into summer driving season. So we'll be watching to see what the demand picture looks like over summer. Some of the big European refineries will be coming out of maintenance, so we can see a pickup in demand from those refineries. But what we are also watching that could be a catalyst for a move potentially higher would be if there's any return of geopolitical risk in this market. And remember, we had that big run up in prices earlier in the year because we had, you know, heightened tension in the Middle East. We had active confrontation between Iran and Israel that people thought could potentially pose risks to major waterways like the Straits of Hormuz and lead to new attacks on energy infrastructure like we saw in 2019. None of that has come to pass so far. The war in the Middle East rages on, but energy supplies have been largely unaffected. So the question is, does that change potentially over the summer? What's been amazing, Halima, is the stability in the price of oil. I know we had the COVID crash and oil going negative briefly, Trust me, I remember that day very vividly. But yet, if you go back, the price of oil three or four years ago was about 75 to $80.00. Today it's about 75 to $80.00. Yeah, it's swung. But overall, the last couple years it has been minus that initial spike, of course, post Russia invasion of Ukraine, been fairly consistent, right. We've had these temporary spikes in oil prices due to geopolitical concerns. Again, Russia, Ukraine, There was a lot of concern that we would see potential sanctions on Russian oil exports. Same thing with the, you know, the Gaza, Israel war. We thought that we could see potential Middle East supply disruptions. When those disruptions don't come to pass, we focus on the fundamentals of the market, market and the relative balance between supply and demand and the fact that OPEC has been cohesive and has essentially managed this market, you know, fairly strongly since we've seen them get back together in the spring of 2020. Robert, everybody hated oil and gas for so long, but they've printed money for investors the last couple of years. How do you and your team view investing not just in oil and gas but energy at large? Thanks for having us, Brian. At the end of the day, you're looking at a strong cash flows, right, oil in the last three years in fact has recession basically had a recession in earnings And if you, if you look at this last quarter, they were you know second to last in terms of their earnings contribution actually was negative for the S&P out of all 11 sectors. So, but we believe they're they're turning the corner again, you look at Exxon at a strong cash flow and dividend yield a 3.2%, but they're also boosting guidance not only on earnings but on those, those those dividends. So we like the dividend growers, we we like the cash flow while you wait. Most investors are under sort of invested in energy and as you just heard, there's that geopolitical hedge by putting energy in your portfolio. And again if you look at Exxon, it's about a 13 multiple relative deal over a market about 20. So there's some value opportunities built in, but let's not, let's not forget about what Lima was saying, which is you know Opec's got a strong grip on this price stability and in two weeks they're going to have their meetings. So we're going to see what the outlook for energy is going to be moving forward and obviously the geopolitical tensions in the Middle East as well as Iran has an election coming up. So a lot of uncertainty in the oil markets, but right now the valuations are still very compelling, Brian. Well, I guess, Robert, when you talk about Iranian elections, you got to the air quotes, 'cause we all know there's not a lot of democracy in those elections in Iran. That aside, Halima, I would, I would actually add to the geopolitical risk to just domestic risk because as I launched at the top, we found out today that New Jersey Congressman Frank Pallone and other House Democrats are going to not only be investigating OPEC, but also U.S. oil companies. They're demanding documents from Exxon and Chevron and Occidental and others about whether or not they colluded, probably because they just met with some OPEC members at conferences you and I both go to. So the question is, Robert mentioned the June 1st OPEC meeting. No way that's going to be in person now is it right. And if it is, I'm not sure I can go now that Congress is investigating it. Well, certainly we, I don't think we're going to see any energy company officials attending any OPEC meetings. What I do think is interesting is, is that they are sort of revisiting 2020. And remember 2020 is when we had the twin phenomenons of of, you know, a price war between Saudi Arabia and Russia where they couldn't reach an agreement at that March OPEC meeting and essentially said game on, you know, the ultimate game of chicken in the oil market. When we had also the biggest collapse in demand in history. And remember President Trump at the time didn't initially know whether this was a good thing because obviously prices were collapsing. Initially thought it was a good thing potentially for you as consumers, but then you really face a specter of oil and gas companies in the United States going out of business and that price environment. And remember, in April, President Trump played a really big role in orchestrating the biggest OPEC plus production cut in history was done on the sidelines of the G20 virtual meetings. And remember when Mexico basically zoomed out? Because I wouldn't agree. I mean, President Trump, if you remember that all the discussions apparently played a pretty big role in getting, you know, solving for the Mexico situation. So I think it's also important to go back and think about like what that moment was when there was a lot of dialogue between U.S. officials, OPEC and energy companies. And I think we're going to be doing a lot of that revisiting over the next couple of days and weeks, maybe even tonight on last call, 7:00 PM, Eastern, 4 Pacific, TuneIn, everybody. I'll be there, Robert. I mean all this stuff that's going on, does that affect how you would view an Exxon Mobil as an investment? Absolutely. Again, strong earnings and excellent management and also viewing for the future well positioned at the, you know, onset right now. There's always going to be that geopolitical tension and there's always going to be that inherent volatility. We we discussed it before you're you're just going to want to be you know investing for the the long haul the valuations there and the and the dividend yield is there. But keep in mind for Memorial Day coming up this weekend, this is the second most expensive you know gas price in a decade and you're looking at you know $6 in some counties in California. And you know we're all consumers and this is election season and it's all about kitchen table economics. So what we saw earlier this week of what President Biden did, you know, basically announced the drawdown of a million barrels, you know in the Northeast reserve, Strategic Petroleum Reserve And then ultimately closing that, that came out of the March legislation, of the, you know, 1050 page legislation that we had to fund the government. And that was a nice little byline, but but at the end of the day, we have to you know build back that reserve and you know this is political season. So even if we were to, you know, try and have that that million barrels that actually funds the government with a, you know, 175, you know, $1,000,000, you're going to have 15 minutes of the government funded and and that's really not going to move prices for a gallon of gas by maybe 4% between now and July 4th weekend. So you know, politically there's going to be a lot of pressure on the downward pricing. But I think because of you know, all of the population growth long term and the demand for summer driving season, you know, consumers want to get out but they're not you know they're they're not distracted by the the pain at the pump that they're seeing right now. So that's going to weigh in on how we play out this summer. We believe prices are going to go up and that's not going to play too well politically, no. And you're right about, I don't know if you watched the show last night we talked about how the the the White House and listen by the way any White House would do it taking credit for an act of Congress. White House had nothing to do with the with the the sale of the 1,000,000 gallons of gasoline. It was mandated, to your point, by Congress in that March law, the timing they could decide, but otherwise forget about it. I want to ask you though, Robert. There's been really an interesting today, first, today, First Solar is the best performing stock in the S&P 500. I know that because we're prepping for the show tonight. But overall, it's been tough for investors in renewables the last couple of years. And yet all we're told is that renewables are the future, right? Fossil fuels are going to phase them out and renewables are going to do everything. But if you if you if you ignored that advice into the opposite invested in oil and gas and did not invest in or maybe even shorted renewables, that's been an amazing trade. But it's not scaring you off of a stock like Next Era Energy, the biggest renewables producer in the United States, the company formerly known as Florida Power and Light. Yeah, you know Next Era Energy is is a company that we like. In fact they just had a phenomenal earnings report and they upped guidance not only on the top and bottom line but also increase their dividend as well. But Florida Power and Light, you know 70% of Next Era is just that they they you know fund or they supply over 6,000,000 homes for energy in Florida. That being said, they're more of a utility Brian and if you look at since March or May 1st, utilities have actually been one of the best performing sectors of the SP500. In fact this particular stock is now ahead of the the the 50 and the 200 day moving average have just signaled a strong bullish signal moving forward. But yeah, they are the leader in renewable energy and you know first solar's up 10% today, but that renewable energy trade has been sort of not so hot, if you will. And that's just because you know 70 at the end of the day you and I and everyone, you know there's 22 million planes that are using jet fuel. There are you know 5 million, you know, freight train or freight trucks that are delivering, you know, keeping our, our shelves of their stores full and delivering our Amazon packages. So we're not flipping a switch to renewables anytime soon. I will tell you that the, you know carbon capture and storage companies even like Next Era as well as Exxon are investing for the future, but that's long off. And you know here's one other item that you have to keep in mind. If you look at the last quarter, just the sector specific in energy and we actually look at the conference calls the last actually six quarters the the renewable and clean energy and climate change has dialogue if you will. If you look at that has come down by 50%. And what's actually changed is the AI conversation that's up over you know five times. So AI also has an opportunity to play a role here in the energy sector, obviously every sector and as it's transforming the economy. But that's very interesting where the renewables on the conference calls and the clean energy in the conference calls have taken a back seat. That was a big story 2023, but the focus is we're not flipping a switch right now. We, we still need, you know, the energy of today as well as funding it for tomorrow. But, you know, we're going to see that play out over time. But it's going to take, you know, a decade. Yeah, I mean, it's a great point. And you know, holy, Melissa, there's a giant new solar field opening up in Phoenix. We're going to show that tomorrow night on last call, but it's going to go to power data centers, a lot of these places. So if you're building out these huge renewable farms to power data Centers for AI, you're not building them out to power our homes, because I guarantee you the privately held facilities are going to pay a lot more for that power than a regulated utility. But to Robert's point, everybody's been wrong about maybe not everybody but global oil demand, Even the IEA, which has been very, very bearish relative to other prognosticators, even they are showing a jump in oil demand globally for the next couple of years, if not decades. Are we wildly underestimating how much power overall the world is going to need for the next number of 20-30 years? I mean, when we talk about AI, look at the demand for natural gas that we are going to actually need when we think about data centers and part of the play in the Middle East for why they are focused on their own AI development, why they think they can be like a center of AI is because they have cheap energy that can power the AI data centers. But when we think about energy and the demand for energy, look at the developing world, we still have millions of people using biomass to heat their homes. And so I think that the demand that we're going to see for energy that's going to continue is as you have sub-Saharan Africa, parts of Asia trying to move their populations into the middle class, they will need energy to do so. So that is going to be continually a driver for demand growth. And we saw this really big debate play out at COP 28 in Dubai in December where you we've had representative developing nations saying we do not want to be consigned to permanent poverty. We need to have access to energy to deliver a development dividend for our population. Yes, they are looking at renewables as well. But they are asking, particularly with natural gas to be able to tap the resources in their ground for the development purposes of their nation. Yeah, well said. These developing countries just want a little taste of what we've had for 30-40 years. You flip a switch, the light goes on, you turn a knob, the heat goes on. A lot more people die from cold than heat. And that's a kind of a, a unkept secret, I guess. Robert, I'm going to wrap it up with an audience question from Ted and Ted. We appreciate your question. Thanks for tuning in, which is as an investor, Robert, do you think that so-called traditional oil and gas companies, we'll call it an Exxon, called a Chevron, Occidental, whatever should be investing in the energy transition or stick to what they know? And I and I'll layer on Ted because I think that some of the companies like Shell and BP in Europe, they went hard that way and now they're making a pivot back to what they know. You know to to keep the transition moving forward they have to continue the traditional forms of energy and and investing in that. But what we're seeing at large or a lot more of these large cap you know sector leaders in the energy sector are investing for tomorrow. Again, if you go to Exxon Mobil's, you know sort of look at their most recent research online, the amount of investment in carbon capture and storage is remarkable. The amount of you know, next generation alternative fuels that they're funding in terms of even just little projects to big projects to exploration, they're they're using that. And so you know the large cap companies, you know even to survive have to evolve and that's important. But you know at the end of the day we talked about this, the global energy demand especially from the, you know, developing countries are going to need energy. So it's not just one traditional versus alternative ones. You know obviously you need both of them to meet the supply or the demand of what's needed in the future. So you know we're seeing a lot of these companies get on board and it's not just lip service if you will, they're actually putting real money, real CapEx investments into the future. So we do have a clean future for all of us.