Hillcrest Energy Technologies. (CSE: HEAT)
From concept to commercialization, Hillcrest is investing in the development of energy solutions that will power a more sustainable and electrified future.
Eight years ago, commodities investors cheered when Donald Trump defeated Hillary Clinton in the 2016 presidential election. The next day after the election, the S&P 500 was up 1% and the iShares U.S. Energy ETF (IYE) was up 1.9%.
In the first month following the election results, the U.S. Energy Stocks ETF Index gained 8.6% as investors were convinced of the Trump administration’s idea of increasing fossil fuel supplies.
However, in the two years following Trump’s inauguration in 2017, shares of energy companies plummeted 17.3%. In the last two years of Trump’s term, numerous energy companies’ stock prices have continued to decline.
As U.S. shale oil and natural gas production grew dramatically during Trump’s term, American consumers got cheap energy, but oil drillers paid a heavy price. Dozens of major oil producers were forced out of business after oil production increased by 24 per cent, depressing domestic prices. At least five or six major energy companies went bankrupt during this period, with the top five companies by market capitalisation losing $11 billion in capital.
However, the price collapse has benefited another group of energy companies.
Cheniere Energy Inc. (LNG) benefited from a shift to liquefaction and exporting more and more cheap natural gas, with the company’s shares rising 50 per cent through 2019. Shares of oil refining company CVR Energy Inc. (CVI) were up 69%. Other refining peers, including Valero Energy Corp. (VLO), Marathon Petroleum Corp.(MPC), and ConocoPhillips (COP), also saw double-digit share price gains.
These energy companies are thriving because their revenues are tied to the amount of hydrocarbons they process, not the price. That is, the cheaper the oil and natural gas pumped out of the ground in the U.S., the more money these ‘downstream’ companies make each quarter.
Pipeline companies do the same thing, charging the same amount for each cubic foot of gas, regardless of whether the price of gas goes up or down. Refineries benefit from cheaper feedstock. And exporters make a fortune from the global rush to buy low-cost U.S. fuel.
On the other hand, exploration and production companies (“upstream” energy companies) have watched as the value of their reserves declined each time energy prices fell.
History has been strikingly similar, with the S&P 500 rising 2.5 per cent and energy stocks jumping 3.5 per cent in the first few days after Trump declared victory a week ago.
Shares of some upstream energy companies have risen as much as 20 per cent since the election, however, judging by the experience of Trump 1.0, the real long-term winners should be those that benefit even if oil prices plummet again.
The baseline tariffs of 10 to 20 per cent that the Trump administration plans to impose could trigger retaliatory measures that would make US energy exports uncompetitive. In short, it should be wise to hold shares of diversified energy companies that are sensitive to trading volume during Trump’s second presidential term, which begins in 2025.
