Value And Growth In SMID Energy Stocks

Energy demand is increasing again after a flat decade, find winners in energy stocks.

With political changes, there is a lot of anticipation that “drill, baby, drill” will make material impacts on oil and gas production. I think the impact will be minimal on production, but will indeed add to profit margins of energy stocks — in particular, small and midsize energy stocks.

Frankly, I’ve seen this game before, I have high conviction in that last paragraph.

Fred pounding the table! (Cartoonland somewhere)

From a regulatory perspective, what producers are most likely to get from the new Trump administration is some relief on methane requirements. Under President Biden, the EPA’s final methane rule included:

• increased methane leak detection

• stricter flaring and monitoring

• zero-emitting pneumatics at new facilities including a phase in for existing facilities

• significant costs associated with monitoring

• a $900 per metric ton of methane emissions in 2024, increasing in coming years.

According to those I talked with at the Hart Energy conference in May, those regulations put a lot of financial pressure on smaller and mid-tier producers. The result could be less production and a clear advantage to the larger players who can afford the costs involved.

Under the Trump administration, I expect loosening of the EPA’s rules in 2025. That will help a bit with production. The most powerful impact will be on profit margins. That means upside surprises on some oil and gas stocks. Analysts are not factoring into models yet, meaning a lot of SMID cap energy stocks are still cheap.

In addition, the M&A that Lina Khan threatened through the FTC should abate with her replacement. That is good not only for smaller producers, but midsize producers that were being blocked from being taken over by the majors - Chevron, Exxon, BP - and largest independents like Occidental, ConocoPhillips and EOG.

FWIW, I don’t like any of the Canadian companies at the moment. That could change, but, why take the chance of getting Trumped out of the hand. Below, I cover several U.S. energy stocks, including Permian oil, LNG, biofuels and natural gas, ready to jump in the next few years.

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