Election season brings the inevitable questions about the impact of the outcome on the energy industry. If you want a prediction from me, swipe left. If you want to see how wrong investors got it over the last two election cycles, swipe right.
In 2016, Trump’s surprise victory initially led to a knee-jerk reaction against clean energy and for conventional energy. Over the ensuing 5 weeks, the S&P Global Clean Energy Index (SPGTCED) underperformed the S&P 500 by about 15% while the Energy Select Sector Index (IXE) outperformed by about 5%. But then those pesky fundamentals began to assert themselves. By the middle of 2020 when the next election was still a toss-up, it was a different story. Between 11-1-2016 and 6-30-2020 the S&P Global Clean Energy Index had performed exactly in line with the S&P 500 while Energy Select Sector Index underperformed by about 93%. So much for the President’s impact on markets.
But wait, it gets better.
By late summer of 2020, Biden had pulled ahead in the polls by a margin exceeding the error rate. The S&P Global Clean Energy Index took off and by inauguration day of 2021 had outperformed the S&P 500 by 125% (6-30-2020 through 1-20-2021). Over the same timeframe, the Energy Select Sector Index was up about 20% but had lagged the S&P by about 6 percentage points.
Maybe elections do have consequences.
Not so fast. The Biden inauguration was the day to ‘sell the rumor’ of a policy environment supposedly friendly to clean energy and hostile to conventional energy. Between January 20, 2021 and today, the S&P Global Clean Energy Index fell by over 50% while the Energy Select Sector Index rose 120% and the S&P 500 rose 50%. Even when measured from June 30, 2020, right before S&P Global Clean Energy Index had its big run, to today, S&P Global Clean Energy Index has underperformed the S&P 500 by about 70%! What happened?
A shareholder revolt in conventional energy over abysmal returns during the shale boom forced huge cuts to capital spending and a reallocation of free cash flow towards debt reduction and share repurchase. This resulted in a 40% improvement in operating cash flow and a near doubling of earnings per share even though oil prices were about the same. Pipelines have also benefitted from capital spending discipline, partly because of the continued difficulty of building new pipelines. Thank you, Sierra Club!
Conversely, clean energy investments have suffered from too much capital spending subsidized by tax incentives in the Inflation Reduction Act (IRA). The IRA didn’t mandate new demand, it encouraged and subsidized too much supply. Thanks for nothing Sierra Club!
Profit = Volume x Price minus Cost. In commodity businesses, where product differentiation is not a factor, capital discipline and smart capital allocation drive this equation over longer investment horizons. Elections matter, but so does understanding the profit dynamics of an industry.
Election season brings the inevitable questions about the impact of the outcome on the energy industry. If you want a prediction from me, swipe left. If you want to see how wrong investors got it over the last two election cycles, swipe right.
In 2016, Trump’s surprise victory initially led to a knee-jerk reaction against clean energy and for conventional energy. Over the ensuing 5 weeks, the S&P Global Clean Energy Index (SPGTCED) underperformed the S&P 500 by about 15% while the Energy Select Sector Index (IXE) outperformed by about 5%. But then those pesky fundamentals began to assert themselves. By the middle of 2020 when the next election was still a toss-up, it was a different story. Between 11-1-2016 and 6-30-2020 the S&P Global Clean Energy Index had performed exactly in line with the S&P 500 while Energy Select Sector Index underperformed by about 93%. So much for the President’s impact on markets.
But wait, it gets better.
By late summer of 2020, Biden had pulled ahead in the polls by a margin exceeding the error rate. The S&P Global Clean Energy Index took off and by inauguration day of 2021 had outperformed the S&P 500 by 125% (6-30-2020 through 1-20-2021). Over the same timeframe, the Energy Select Sector Index was up about 20% but had lagged the S&P by about 6 percentage points.
Maybe elections do have consequences.
Not so fast. The Biden inauguration was the day to ‘sell the rumor’ of a policy environment supposedly friendly to clean energy and hostile to conventional energy. Between January 20, 2021 and today, the S&P Global Clean Energy Index fell by over 50% while the Energy Select Sector Index rose 120% and the S&P 500 rose 50%. Even when measured from June 30, 2020, right before S&P Global Clean Energy Index had its big run, to today, S&P Global Clean Energy Index has underperformed the S&P 500 by about 70%! What happened?
A shareholder revolt in conventional energy over abysmal returns during the shale boom forced huge cuts to capital spending and a reallocation of free cash flow towards debt reduction and share repurchase. This resulted in a 40% improvement in operating cash flow and a near doubling of earnings per share even though oil prices were about the same. Pipelines have also benefitted from capital spending discipline, partly because of the continued difficulty of building new pipelines. Thank you, Sierra Club!
Conversely, clean energy investments have suffered from too much capital spending subsidized by tax incentives in the Inflation Reduction Act (IRA). The IRA didn’t mandate new demand, it encouraged and subsidized too much supply. Thanks for nothing Sierra Club!
Profit = Volume x Price minus Cost. In commodity businesses, where product differentiation is not a factor, capital discipline and smart capital allocation drive this equation over longer investment horizons. Elections matter, but so does understanding the profit dynamics of an industry.