Trump, OPEC, Energy and Alternatives

December 15, 2016

The energy world is receiving an expanded examination from Mizuho with additional energy research coverage in recent months. 

Mizuho continues to build out its energy research platform with the initiation of coverage from two senior analysts – Timothy Rezvan, focusing on oil and gas exploration & production, and Brian Zarahn, focusing on MLPs and natural gas infrastructure. Jim von Riesemann, who provided his perspective on alternative energy earlier this year, continues to report on power, utilities and alternative energy.

So, what do the analysts expect for the industry heading into 2017 and taking into account a new administration in Washington? 

Trump’s impact, according to the analysts, may have disparate effects across different areas of the sector. In the MLP space, for example, the prognosis is positive, says Brian Zarahn, who covered MLPs for nearly a decade prior to joining Mizuho.

The new administration is likely to be supportive of pipeline development and energy production. Particularly in the regulatory space, it is likely that, for the next four years at least, there will be less regulation on pipeline permitting and the themes of energy independence will become more prominent. However, the impact of this change is likely to be tempered by the commodity price environment, as companies will only produce and drill under economic terms.

For Rezvan, 2017 is likely to manifest the disconnect between growth-oriented company guidance and the reality of challenging commodity prices and inflationary pressures. As companies attempt to prove the resiliency of their capital programs and promise to add rigs across the board, costs are likely to come up. Companies that can remain nimble with their spending will remain in favor in 2017, he concludes.

Despite initial assumptions, a Trump presidency does not necessarily sound the death knell for the alternative energy sector, says von Riesemann. The reality is that alternative energy projects contribute to underlying local economies and create jobs. At the same time, tax credits for solar and wind energy projects are scheduled to sunset under a glide path by the end of the decade. Importantly, if technology continues to improve, as it has, renewables may be competitive without the subsidies by that time too making the tax credits all but a moot point. In other words, the renewable sector is not going away, especially since the economics largely work in its favor.

Another critical industry event, the November 30 OPEC meeting, resulted in much discussion and adjusted expectations for the industry moving forward. “We believe the 1.2 mmb/d OPEC production cut is incrementally positive for the midstream sector by quickening oil supply/demand rebalancing in 2017,” wrote Zarahn following the meeting. “However, the tailwind could be partially offset by a lack of compliance. We expect improving energy fundamentals to support higher infrastructure volumes, capital market access and cash flow growth.” Zarahn’s top picks include high-growth names such as Dominion Midstream Partners (DM), Noble Midstream Partners (NBLX), Phillips 66 Partners (PSXP), Shell Midstream Partners (SHLX), Tesoro Logistics (TLLP) and Valero Energy Partners (VLP). 

Rezvan finds himself “incrementally more bearish on the industry following Wednesday’s OPEC-induced rally in oil prices and all but the gassiest E&Ps,” he wrote in a research note. “We see the rally as more of a catch-up from recent sell-off than as the first leg of a new rally.” The real opportunity is to buy top gas picks, such as Rice Energy (RICE) and Southwestern Energy (SWN), following the November 30 meeting.

With the changing of the guard in Washington, in addition to OPEC and commodity concerns, 2017 promises to be a year of challenges and opportunities for the energy sector. With an expanded research team, Mizuho intends to keep investors well informed.

Simon Hylson-Smith

CEO, Paragon

Simon Hylson-Smith is a former financial industry editor and currently CEO of Paragon.

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