In last week’s Energy Trends Insider (ETI) I explained The Obama (Non)-Impact on Oil & Gas Companies. In addition to my article, Andrew Holland discussed How the Obama Administration Will Deal With Natural Gas Exports and Elias Hinckley concluded the issue with Increasing Talk of Climate Change and Carbon Taxes Impacts Energy Industry. As we have done previously, we would like to share a story from ETI with regular readers of this column. Interested readers can find more information on the newsletter and subscribe for free at Energy Trends Insider.
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The Obama (Non)-Impact on Oil & Gas Companies
Following President Obama’s reelection, a number of fossil fuel stocks sold off based on the belief that Obama’s policies would prove harmful to the fossil fuel industry. But will the President manage to push through tough new regulations that raise the cost of production for fossil fuel companies?
Although President Obama often took an antagonistic position with respect to the fossil fuel industry during his first term, the industry actually fared pretty well. U.S. oil production and dry natural gas production were both sharply higher during President Obama’s first term, but coal production fell slightly relative to President Bush’s second term.
To be clear, the production increases for oil and natural gas were not the result of President Obama’s energy policies. Rather, it was due to persistently high oil and gas prices during the latter part of the last decade, which led to record investments by oil and gas companies into the development of new projects.
A historical analogy of the recent oil production increase began during the Nixon Administration. In 1973 President Nixon pushed through the Trans-Alaska Pipeline Authorization Act, which cleared away legal challenges from environmentalists seeking to stop construction of the pipeline. But the pipeline didn’t start production until 1977, during President Carter’s first year in office. As a result, after a sharp decline in oil production under President Nixon, oil production rose for the first 2 years of President Carter’s term. But just like the production increase over the past four years, the production increase in Carter’s first two years was a result of events that took place during an earlier administration.
The lesson here is that in the short term, the energy policies that President Obama is pursuing today are unlikely to impact oil or natural gas production for several years. If he continues to adopt an antagonistic stance toward domestic oil and gas producers, the impact will be felt most strongly after an appropriate lag time.
In any case, fossil fuel companies fared well during Obama’s first term. Consider first the performance of the AMEX Natural Gas Index. This index is comprised of 20 companies involved in the production and distribution of natural gas such as Apache Corp. (NYSE: APA), Chesapeake Energy Corporation (NYSE: CHK), EOG Resources, Inc. (NYSE: EOG), Devon Energy Corporation (NYSE: DVN), and Kinder Morgan, Inc. (NYSE: KMP). During President Bush’s second term, the index rose sharply with the price of natural gas until mid-2008, at which time the index collapsed along with the price of natural gas. Because of this collapse in price, when President Bush left office, the index was only 21% higher at the end of his second term than it was at the beginning.
The rise in the index was not as steady during President Obama’s first term, but this was also a time of weakening natural gas prices. Nevertheless, the index increased by 85% between the beginning of President Obama’s inauguration and the present time.
This performance wasn’t limited to natural gas companies. During President Bush’s second term, the share price of Chevron (NYSE: CVX) increased by 48%, but it increased by 75% under President Obama. The share price of Schlumberger (NYSE: SLB) increased by 19% under during Bush’s second term and 98% during Obama’s first term. Even coal producer Peabody Energy Corporation (NYSE: BTU) performed slightly better under President Obama (22% increase in share price) than during President Bush’s second term (18% increase).
This exercise is not meant to demonstrate that President Obama is better for fossil fuel companies than was President Bush. What the exercise demonstrates is that external factors grossly trump presidential policies when it comes to the performance of these companies. Price is the most important determinant, but companies with superior management and good decision-making can make money even when prices are softening.
The other item to note from the above exercise is that in every case, the returns were positive across both administrations — during a period that saw oil prices swing between the $30’s to nearly $150/bbl. Over the long term, I have always believed that fossil fuel investments are pretty good bets regardless of the political climate.