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ISSUES....
Inside, confidential and off the record

 

Trump's: $20 oil

Trump's energy policy could lead to $20 oil: An investor's guide




As a thematic investor, I like disruption because that's where I find the best long-term investment opportunities.

So, now that Donald Trump is the next president, it's time to reflect on the policy ramifications of this historic event. It's historic because Trump has a very conservative Republican Senate and House to work with. To give you an idea of how conservative Congress is, especially regarding energy policy, check out the bio of Jim Inhofe (R-OK), the head of the Senate Environment and Public Works Committee. He's not only a climate skeptic but he authored a 300 page book about climate change entitled “The Greatest Hoax.”

Senator Inhofe's committee is the overlord of the EPA. Gina McCarthy, the current head of the agency, will be quickly replaced with a more business friendly head. Thus, I would expect a torrent of policy changes in the early days of this administration.

Besides changing our energy policy, Trump will have a willing Congress to help him lower tax rates, reduce the regulatory state; eliminate Dodd-Frank, the ACA and the Mercury Air Toxic Standards (MATS) rules. These changes plus his pro-growth tax plan would boost economic (GDP) growth to 5%. Meanwhile some of these regulatory changes would create significant disruption for a number of commodity prices as well as stock prices. As investors who garner many of their investment ideas from changes in government policies, we're giddy.

I'll start with energy. Trump emphatically supports developing U.S. energy reserves, a sharp break from the restrictive policy of the last eight years. Additionally, he's critical of the ambitious climate regulation enacted by Obama and his EPA. He will ask Trans Canada to renew its permit application to build the keystone pipeline as one of his first acts. He will open up the Southeastern Outer Continental Shelf (OCS) to exploration while eliminating moratoria on drilling for oil in Alaska and on other federal lands (Alaska was once the number one oil producing state, and due to Obama's policies, it's now number nine). Congress will back him on all of this and so will the governors of the affected states.

There are over 100b barrels of oil lying fallow in U.S. territory – on land and in shallow water, requiring conventional drilling rigs. Thus, the cost of recovery is very low. When I start to see some of these plans come public, I will short oil directly (using DUG) and look for opportunities to own any oil service companies that might benefit. The two companies that control the “jack up” market globally are Rowan Drilling (RDC) and Ensco, plc. (ESV). I feel certain that if we opened U.S. oil spigots, the price of oil could fall into the mid $20s per barrel and stay there. I'm bearish on oil prices under President Trump.

And I'm bullish on coal because Trump is unabashedly pro-coal. While after a near-fatal bout with President Obama's relentless EPA, BLM, OSHA and FLRB, the coal industry is gasping for air. The government literally forced half of the publicly traded coal miners into bankruptcy. Only a couple of companies have survived and I like them both: Foresight Energy (FELP) and Hallador Energy (HNGR).

Over 20% of coal fired power generation has been forced off line since President Obama took office yet we still need coal to maintain the sanctity of the nation's electricity grid, which is currently at risk. The new head of the EPA will recognize the importance of coal and embrace it. I would expect a massive and sustained rally in the industry.

In summary: This election cycle was as momentously shocking as it is potentially important and lucrative for investors. With a conservative-united House, Senate, and President, policy changes will come swiftly and dramatically. The energy sector is an area in which investors should focus, as Mr. Trump's approach to coal, green energy, and oil is radically different than that of the previous administration.

Thomas Landstreet / Forbes / Nov. 9, 2016

I own shares in Foresight Energy (FELP). Thanks to Brandon Skordas for research assistance.



ISSUES.... 11/ 21/ 2016 - Send Us Your Issues

ISSUES.... Inside, confidential and off the record

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