How Trump policies may boost, and burden, energy stocks and crude oil

Fossil fuel stocks have rallied even as oil prices have slumped over the past week, with investors moving to price in the likely effect of Donald Trump’s election victory on the energy industry. The impact of the president-elect’s platform could be contradictory. While oil stocks tend to follow the direction of crude prices, the energy sector has gained 3.6% since election day, slightly outpacing the S & P 500. At the same time, West Texas Intermediate and Brent are down 5.3% and 4.7%, respectively “There is a balance in the industry where you want regulations that encourage development but not a wave of supply coming online that punishes pricing,” said Andrew Dittmar, a principal analyst at Enverus Energy Intelligence . Conflicting signals The crude futures market and the oil and gas stocks appear to be taking different messages from Trump’s victory. On the one hand, the Republican has promised to boost production, a bearish signal for prices at a time when the crude market is already facing a surplus next year. And stiff tariffs on China could also slow the world’s second-largest economy, potentially crimping crude oil demand. Investors in the energy sector, on the other hand, are celebrating the prospect of less regulation with Republicans on the verge of winning a majority in the House of Representatives and taking control of both Congress and the White House. The American Petroleum Institute on Tuesday issued a policy paper addressed to Trump calling for his administration to boost liquid natural gas exports, issue more offshore and onshore leases and reform the process for permitting pipeline construction. The SDPR S & P Oil and Gas Production ETF has rallied nearly 6% since Trump’s victory. More pipelines, LNG exports The second Trump administration will likely have its biggest impact by allowing more interstate pipelines and ending a moratorium on new liquid natural gas exports , Dittmar said. “You could also see an uptick on lease sales in the Gulf of Mexico and federal onshore land,” the analyst added. The Biden administration offered the fewest oil and gas leases in U.S. history under a plan that allowed companies to drill in a maximum of three new areas exclusively in the Gulf of Mexico through 2029, according to the Interior Department . Offshore drillers such as Tidewater, Transocean and Noble Corporation are all potential beneficiaries of increased activity in the Gulf under Trump, said James West, an analyst at Evercore ISI. Since the election, natural gas stocks have been big winners on the prospect of more pipeline permitting. Producer EQT Corp . is up nearly 17%. Pipeline stock Kinder Morgan has risen more than 10%, while rival Williams Companies is ahead about 7%. Liquid natural gas stocks Cheniere Energy and Chart Industries have risen about 11% and 14.4%, respectively, as investors look forward to Trump ending the pause in new LNG exports imposed under Biden. The oilfield services companies are also major beneficiaries under a Trump administration, West said. Baker Hughes , Halliburton and SLB have each gained between 6% and 14% since last week’s vote. Lower taxes, less environmental regulation The oil and gas sector will also benefit from looser environmental regulations. Trump has chosen former New York GOP congressman Lee Zeldin to lead the Environmental Protection Agency. Zeldin told Fox News on Monday that the EPA under Trump will roll back “left-wing” regulations. One rule that could be on the chopping block is the methane emissions fee for oil and gas companies that the Biden administration’s EPA just issued on Tuesday. “Companies that had a regulatory overhang from provisions in the IRA addressing methane emissions have performed well potentially on the expectation those rules may be more loosely enforced or even scaled back given congressional control,” Dittmar said, referring to the Inflation Reduction Act . Investors in oil and gas stocks also see the sector benefiting from the extension of current corporate tax rates or efforts to reduce them further under Trump, the analyst said. Oil surplus headwind More ominously, an oil and gas production boom under Trump would lower crude oil prices and likely act as a headwind for the industry. The U.S. is already the largest fossil fuel producer in the world — pumping more than even Saudi Arabia and Russia — and has been since 2018, according to the Department of Energy. Perhaps for that reason, energy analysts and industry executives don’t see Trump’s promised production boom materializing. Record amounts of oil and gas have come out of the ground under the Biden administration, and Trump’s powers as president to increase output are also limited, according to analysts. Only about 25% of oil and 10% of natural gas production is on federal land and waters, according to a Morgan Stanley report in August. “Under a Trump administration, regulations will be a little easier, both in the permitting side and adding the necessary infrastructure,” but are unlikely to prove “a game changer” in current circumstances, Wells Fargo analyst Roger Read told CNBC before the election. In fact, Exxon Mobil CEO Darren Woods has said that production levels at the country’s largest oil and gas producer won’t change in response to Trump’s victory. Exxon’s investments in production are based on how much those projects can return to shareholders, not the political change brought by the election, he said. “I’m not sure how ‘drill, baby, drill’ translates into policy,” Woods told CNBC’s ” Squawk Box ” on Nov. 1, referring to one of the Trump campaign’s more memorable slogans. Exxon and Chevron have gained more than 1%, respectively, since Trump won the election. Bu whatever energy policy comes out of the White House and Capitol Hill, there’s widespread agreement that there’s little downside for the industry. “He’s pro business and he’s pro deregulation,” West said of Trump. Disclosure: Evercore ISI has acted as a co-manager of a public offering for Noble Corporation, has provided banking advice to the company and has received compensation in the past 12 months.