For wholesale investors in Australia

Research in action: can the energy recovery continue?


Matt Peron

Matt Peron

Director of Research | Portfolio Manager

Noah Barrett, CFA

Noah Barrett, CFA

Research Analyst

Mar 10, 2022

In this episode of Research in Action, Research Analyst Noah Barrett explains what’s behind the recent rally in energy stocks and why he thinks supply/demand dynamics for crude in the post-pandemic economy will likely be supportive of the sector.

Key takeaways

  • Even as oil demand rebounds from the lows hit during the pandemic, supply has lagged as a result of under-investment in new production, geopolitical tensions and capital discipline among companies.
  • The imbalance has put upward pressure on crude prices and could continue to do so, especially if peak oil demand isn’t reached until 2030 or later and companies limit production growth, as we expect.
  • Even so, we think the sector still trades at a discount to its long-term growth prospects, reflecting investor skepticism about the current energy cycle and worries about potential near-term headwinds, such as rising interest rates.

View Transcript Expand

Carolyn Bigda: So far this year, global equity markets have been in retreat, with nearly every sector in the red. But one area of the market stands in sharp contrast to this downbeat performance – energy. For the year through February, a benchmark of energy stocks has climbed nearly 30%, compared with a negative return in the S&P 500 Index. Looking back over the past year or so, the performance gap is even wider.

But has the sector come too far too fast? And will a growing supply/demand imbalance – made more complicated by the conflict between Russia and Ukraine and the push for alternative energy – hurt or help the sector?

Today, we’re joined by Noah Barrett, one of Janus Henderson’s Energy Research Analysts, who’s offered to help make sense of it all and share what he sees ahead.

I’m Carolyn Bigda.

Matt Peron: And I’m Matt Peron.

Bigda: This is Research in Action.

Noah, thanks very much for joining us. We’re excited to have you on the program as we try to understand what’s going on in energy, which is really being buffeted by some pretty powerful crosswinds right now. But to do that, I think we have to take a step back and explore how we got here. Because while crude recently topped more than $100 per barrel, just about two years ago, that same barrel traded round $40 and even went negative for a brief time while energy stocks were the market’s laggards.

Noah Barrett: Yes, thanks, Carolyn. You know, energy is, it’s a cyclical sector and so without going too far back in history, maybe just give a quick recap on what’s happened over the past several decades to help set up and frame, you know, what we think about today when we look at the energy sector.

So, if we take the U.S., for example, U.S. oil production, the prior peak was in 1970, and in the U.S., we peaked out around 9.6 million barrels/day of production growth. From 1970 to call it mid- to early 2000s, production was on a steady decline over that time period and hit a low of 5.2 million barrels/day in 2005.

Something really significant in the sector that happened at that period was the advent of unconventional drilling. And so, when people talk about fracking or the shale revolution, that’s what they’re referring to. And so, essentially, you gave engineers enough time and money and they figured out a new way to get oil out of a resource that was previously thought to be uneconomic. A lot of capital flowed into the space, and U.S. production started growing again. And from 2005 to 2019, that growth, we hit a new peak eclipsing that mark hit in the ’70s. And in 2019, we were producing 12.3 million barrels/day here in the U.S.

That production growth resulted in a lot of things. You know, I’d say companies’ management teams, they were incentivized to grow. If you looked at how they were paid, a lot of it was tied to production growth metrics, not free cash flow and not returns on capital. And for a while, you know, that was okay because we needed U.S. oil production to grow. If you think about that period, kind of in the early 2000s, you know, China was growing quite quickly, and they were using a lot more oil. And so that U.S. barrel coming into the global market, that was needed to help balance supply and demand.

Bigda: So that’s the famous shale revolution we’ve heard about that had enormous influence on the energy sector. What happened next?

Barrett: If we go, you know, first in early March of 2020, kind of this was in the early stages of the pandemic but a lot of people forget this, they think that the initial oil price correction was driven solely by the pandemic, but it was actually driven by a decision that Russia was going to pull away from OPEC+1, and Saudi Arabia responded to that by deciding that they were going to go into a market share war. So, they cut their, what they call OSPs, official selling prices, they cut the price of oil, and they signaled to the market that they were looking to take market share instead of working together to keep oil prices in a manageable range.

That was the initial catalyst for the first correction, the sharp correction in both oil prices and energy equities. As we moved through the month of March, I think that’s when the impact of the pandemic on oil demand really hit home, and you saw countries across the globe, you know, instituting lockdown measures and oil demand dropped materially as people weren’t traveling anymore. They weren’t flying, they weren’t driving, companies were shutting down, people weren’t going to work. So that was the sharp correction in oil demand and essentially, the market was, the oil market was responding to both a supply shock and a demand shock at the same time, which sent oil prices spiraling downward rather quickly.

In April, so just a month later, after Saudi announced kind of a market share strategy, they quickly reversed course. OPEC+ got back together and decided that they needed to support the oil market on the supply side, and so they reinstituted some coordinated cuts among all OPEC members and that helped oil prices bounce off the bottom.

Bigda: Okay, so now let’s fast forward to more present day. I guess we can look at maybe what happened over the last year, 2021. You know, what were the catalysts there that started to turn things around for the sector, where crude prices started to rise again and energy stocks started doing much better?

Barrett: Yes, so in the past year, we started to see some positive trends on both the supply side and both the demand side that were supportive of oil prices. Maybe starting with the supply side, a couple, you know, key things that we were watching and that we noticed, you know first of all, OPEC+ was functioning pretty well. You know, it’s really hard to get a group of, you know, 12 to 15 different countries to all agree on policy. You certainly, in the past, have seen some countries, you know, cheat on their production quotas or just have different views on how much oil was needed in the market. But OPEC+, you know, all members were working together and they kind of succeeded in coordinating supply cuts across the oil market and, you know, helping to support oil prices in a time of extreme volatility.

Something, you know, that was also positive on the supply side was you saw a shift from U.S. producers in terms of philosophically how they run their businesses. You know, as I just talked about, I think in prior cycles, it was all about production growth, and there’s been a recognition that investors don’t really want runaway production growth. They want companies to generate free cash flow on a sustainable basis, and they want companies when oil prices are high and companies are generating a lot of cash flow, investors want to see some of that cash flow come back to their pockets in the form of dividends or share repurchases. So, I think, you know, that’s been a fundamental shift just in terms of strategy of what we’ve seen from U.S. producers relative to prior cycles.

And then maybe another point is we’ve been under-investing as an industry in new production for quite a while. And through a downturn, companies get really smart at managing their production. There are a lot of short-term levers they can pull on the cost side. You can defer maintenance for a little bit, you can just get more efficient in your operations. But a lot of those are one-time levers, and so going forward, I think it’s going to be harder and harder for companies to find those efficiency gains. And, you know, after years of not spending on new production – and the outlook for spending on new production is pretty low relative to history – it all points to signs of a tightening market on the supply side.

Bigda: And then meanwhile, it seems that demand has been roaring back since the height of the pandemic, as the economy kind of gets restarted. So, what’s going on with the demand side of things?

Barrett: Yes, on demand, certainly you know off the lows, I think global oil demand troughed in the heart of the pandemic at roughly 75 million barrels/day, maybe 70 million barrels/day. But that was a sharp spike downward, it bounced back. And over the past year-and-a-half – as economies have reopened, as people have gone back to work, felt more comfortable traveling both for personal and business reasons – oil demand is recovering quite nicely. And, you know, I think the expectation going forward is that if as the global economy, global GDP continues to grow, we will see a steady grind higher in global oil demand growth going forward.

Peron: And Noah, can you talk about how we on the Research Team are modeling demand for oil, especially given potential demand destruction as we try to rely less on oil as a transport fuel?

Barrett: Yes, so we can, we use several methods. Oil demand is certain notoriously hard to, you know, forecast, but we can get a good sense of directionally where we think it’s going. So, we can use a mathematical model, some regressions to look at global GDP growth and historical relationships between global growth and global oil demand growth. We can also look on a regional basis. Emerging economies are generally more oil intensive than say developed economies. So, if we think that global growth is going to be disproportionately driven by, say, emerging economies in Asia, Southeast Asia or Latin America, those are all signs that help us get a better sense for, you know, ultimately what we think global oil demand growth will be.

Peron: And do you get a sense as to when – and I know this is very difficult and there’s so many inputs, as you just enumerated – but when do you think the demand curve starts to roll over and we start to see oil demand decline? Is [there] any sense of that?

Barrett: Yes, so I think there was a knee-jerk reaction in the pandemic of that, you know, we may have seen the peak of oil demand and oil demand would never eclipse, you know, the levels we saw in, say, 2019. I would take the other side of that, and I think oil demand in 2022 will hit all-time highs. And so, my view on oil demand growth and the outlook is that I think it’ll continue to grind higher through the end of the decade. I do think, you know, sometime in our lifetime, call it between 2030 and 2040, we will see peak oil demand growth, but I personally don’t believe we’ll see peak oil demand, you know, any time before 2030.

Bigda: So, I think one of the big questions is whether the sector can keep delivering gains from here. And Noah, that probably comes down to the outlook for supply and demand for oil and gas over the coming months. You talked a little bit about the demand picture, but are there other variables that could influence demand for oil, especially in 2022?

Barrett: I think, you know, as Matt was talking about, it’s incredibly hard to model demand because there are so many variables. But just touching on a few of the key ones to think about, what could really move the oil market, you know, in one direction or another? First one is kind of any new type of COVID outbreak, any type of new variant that would cause new lockdown measures or maybe just make people nervous about traveling and change their mobility behavior. That’s certainly something to watch about.

Another demand factor that we look at is persistently high, you know, energy prices. And when I say energy prices, that can be both prices at the pump, you know, gasoline prices. It can be natural gas prices, which are a big input for utilities and are reflected in people’s heating bills. And diesel prices, jet fuel prices, you know, many companies pass through higher energy costs directly to their customers. And so, to the extent that oil prices, energy prices get to some level that’s too high, you know, maybe that causes a reduction in overall energy demand and oil demand.

Bigda: So, Noah, let’s talk about supply, which has maybe become a little more tricky after the pandemic.

Barrett: When I think about the global supply picture, I think it’s helpful to break it down into three general buckets. The first one is OPEC+, the second is the U.S. and then the third is everything else in the world. So, if I think about OPEC+, as I mentioned before, they do have their coordinated cuts in place and they’ve been very transparent about that, you know, how they think about returning supply to the market. So right now, there’s a plan that they’ve been sticking with of bringing back 400,000 barrels/day into the market every month. And assuming they continue on that pace, all the curtailed volumes will be back in the market at some point in the second half of this year, probably late Q3, early Q4.

Once those barrels are back, we can think about, you know, other sources of supply. So, moving to the second bucket, the United States, you know, our expectation is that U.S. production will grow 800,000 to 900,000 barrels/day, year over year. There’s been some concern that, you know, given high oil prices and given the industry’s historical lack of discipline, that we’re going to see runaway spending and U.S. production could surprise materially to the upside. I don’t share those views. I think everything we’ve heard from the companies today, at least the large public companies, would indicate that they are sticking with their kind of lower-than-expected production growth forecasts. And the other point is that even if they were to increase spending today, while U.S. unconventional oil is short cycle, it’s not spare capacity. And so, there is a time lag from when you decide to spend $1 in capex [capital expenditure] and to when that production actually comes online. So, you know, even if we saw spending tick up towards the end of first half [of 2022], we wouldn’t see that production come into the market until early 2023. And so, I feel pretty good about our view on U.S. production growth.

And then the last bucket, which is equally important, is the rest of the world. And there, I think because of the under-investment, many countries are still struggling to get back to pre-pandemic levels of production. So, putting it all together, you know, I think it’s harder to see where we could get surprised on the supply side.

Bigda: The other thing we certainly need to talk about are the events occurring in Eastern Europe. As of this recording, we don’t know how the conflict between Russia and Ukraine will be resolved, but we do know the war has created uncertainty for energy markets and put upward pressure on oil and gas prices, given that Russia produces about 10% of the world oil supply and is Europe’s largest supplier of natural gas. What could be the implication for the energy market?

Barrett: Yes, Russia is an incredibly important country and producer to think about because as you alluded to, they’re one of the largest producers, they’re a top three producer of oil in the world. And so, if we were to see some type of political action – I’m thinking about, you know, sanctions against Russia that potentially disrupt their supply – that could have a pretty significant impact on both oil prices and natural gas prices.

Thinking about the oil side of the equation, you know, Russia exports oil to many countries around the globe. And you know, if some of those countries were unable to accept Russian oil, that could cause some problems. You know, I think there’s, it’s kind of mistaken, people think of a barrel of oil is the same across the globe. But a barrel of oil that’s produced from Russia, you know, has certain characteristics. And so other countries that may be able to accept Russian oil, they have limits on how much they can actually import, just because the refineries are configured to run you know, a certain amount or a certain type of crude, and so they just can’t absorb millions of barrels of Russian oil that need to find a home. And so, again, that’s a bottleneck in the supply chain and that could lead to spiking prices or just price dislocations, you know, in certain parts of the world.

On the natural gas side, Russia exports a lot of natural gas into Europe. If that natural gas supply was somehow disrupted, we could find ways, or I should say Europe could find ways to substitute that gas. Perhaps LNG (liquified natural gas) imports from the U.S., from Australia, maybe some additional pipeline gas coming from the North Sea. But there are logistical factors and limitations because Russia imports [exports] so much gas into Western Europe, it’s really hard to replace on a short-term basis.

And so, you know, to me, that’s something we always think about, you know, on the Energy Team, is looking for where could we see dislocations and bottlenecks in the supply chain and knock-on effects to other regions? And so, you know, if cargo gets diverted from Asia and gets moved into Europe, that may solve Europe’s problems, but then, you know, your Asian customer then has a problem of where they’re going to get their supply from. And so, it makes things really challenging, but also, you know, really interesting to try and figure out how all the pieces of the puzzle fit together.

Peron: Noah, typically, when we have a geopolitical episode, how long is the duration of that impact on oil prices?

Barrett: If you look back over history, I think when you had significant political events, generally, global events can lead to spiking oil prices because people are worried about supply outages. I think with the advent of some new sources of supply like U.S. unconventional production, the duration of any price movement is maybe a little bit shorter than it would have been, but it can certainly disrupt an oil market, we’re talking months, maybe quarters.

You know, I don’t know if we’ve seen anything on the scale of, say, a top-three producer like a Russia, for example, their supply being curtailed or artificially constrained for a prolonged period of time, and so I would expect more volatility. You know, the larger the producer and the larger the disruption, generally, a good rule of thumb is the more volatility we’ll see and the more volatility on price we’ll see.

Bigda: And maybe just one last question on the supply/demand situation. You know, what can the U.S. government do, if anything, to ease supply constraints in the near term? You know, there’s talks now around reinstating the nuclear deal in Iran in exchange for lifting economic sanctions. Could that help the supply picture? Could releases from the government’s strategic petroleum reserve (SPR) make a dent?

Barrett: So, in my view, there’s really not much that the U.S. government can do. You know, at least domestically, they’ve taken a pretty strong stance against encouraging U.S. production growth. We’ve seen some actions on limiting or canceling leases on federal lands, and so there seems to be, from a policy standpoint, it’s pretty clear that the administration is not very friendly towards domestic energy production. In actions to date, they’ve been targeted at asking other countries across the globe, you know notably OPEC, to increase their supply to help, you know, keep a lid on runaway oil prices.

Lifting sanctions on Iran, that would bring some oil back into the market, but probably not as much as people think. I think we could see a short-term bump because Iran does have some inventories that they could draw down, but any type of, you know, big increase in supply from Iran, I view that as a very short-term phenomenon, more of a one-time lever, and over the course of this year and certainly as we move into 2023, it won’t really disrupt the overall supply/demand balance.

And then your last question on, you know, the strategic petroleum reserves. Again, I would put that in the bucket of a one-time lever that can be pulled, and so it makes really nice headlines and sometimes oil will move on those announcements. But the SPR was never really intended to be used to combat higher prices. It was more of a buffer in terms of, you know, an action that could be taken if we saw extreme supply shock in the market. And so there, you know, when you see an SPR release, again, it makes a lot of headlines, but empirical data has shown that, you know, oil prices generally revert back to pre-SPR release levels within a quarter or two and often end up higher than pre-SPR release levels.

Bigda: Okay, so if we’re to sum it all up, it seems like there’s room for demand for oil and gas to at least, you know, stay healthy, if not increase from here, while there are a lot of factors that could keep supply more constrained. So, what does this mean from an investment perspective? Are there certain areas of the energy complex that are well positioned for this kind of environment?

Barrett: So, I’m pretty encouraged overall with the outlook for the energy sector. I think drilling in a little bit, looking at some of the energy sub-sectors, I find upstream to be the most compelling area. And when I say upstream, I’m talking about the companies that get the oil out of the ground. And so, if you hear E&P, which stands for exploration and production, those types of companies that are actively involved in drilling and producing oil from a well. Relative within energy, I think the upstream [valuation] multiples are the most compelling. If I look elsewhere in the sector, midstream and oil services, again within energy, those valuation multiples look a little less interesting. Those companies tend to be more at mid-cycle valuations, which would suggest that they’re already discounting some type of recovery scenario.

And then maybe lastly, downstream. And so downstream are the refining companies or chemical companies that take a barrel of crude oil, refine it and ultimately end up producing a finished product like gasoline or diesel or jet fuel. I think one thing that we see an opportunity is for U.S. refiners, in particular, they’re just geographically very well positioned. They have access to global export markets, they have an inherent advantage with a low-cost feedstock natural gas, which helps keep their cost structure more competitive versus global refiners. And so those areas, I think, upstream and downstream, are where we find the most interesting areas to look at.

Bigda: And why have the valuations on the upstream companies not sort of reflected the opportunity there at this point, in your opinion?

Barrett: I think you know, primarily, there’s a lot of skepticism around how disciplined the companies will continue to be. There’s probably some skepticism around the duration of the healthy oil prices that we’re seeing today. And valuations are moving targets, so as oil prices move higher company cash flows and earnings move higher as well for the upstream players. And so, you have valuations kind of keeping up or compressing in line with a higher oil price. And so there, you know, I think upstream continues to look healthy relative to the sector. A lot of companies as well have decided to pull back on traditional hedging strategies, and so they’re much more exposed, you know, for better or for worse, to volatility in oil prices.

Peron: And I think another factor keeping valuations at bay is a general distrust in the market that this energy cycle is for real as opposed to a flash in the pan. You still see a lot skepticism around that, and that’s kept multiples low even using today’s strip prices as the base. And so, from my vantage point, as Director of Research looking across all sectors, energy screens as one of the cheapest sectors still, despite this run, across all the sectors we look at. So, I think it’s got some factors insofar as supply/demand, as Noah has articulated, at its back, but it also has [attractive] valuations, especially relative to the market.

Bigda: Well, and Noah mentioned that the midstream companies were priced for what they thought was a mid-cycle part of where we are in the market. Do we agree with that perspective, or what does that then mean for investing in energy stocks going forward?

Barrett: Yes, mid-cycle, I guess it’s an interesting concept because it is backwards looking. And so, I think that’s one really important thing to keep in mind is that the sector has changed a lot. On the positive side, the companies you know across the energy spectrum have gotten a lot better. The balance sheets are in much better shape, they’re much more focused on free cash flow and returns on capital and shareholder returns. And so that would argue that going forward, you know, the company should trade at higher multiples, relative to history. But it’s also important to recognize that there’s a lot of factors that didn’t exist in prior cycles. So, certainly much more concern around ESG [environmental, social and governance polices], the environmental footprint of a lot of energy companies. Peak oil demand, again, I think in prior cycles, it was more of a concern of peak supply than peak demand. And then a company’s, the growth outlook, you know, with that demand backdrop is just structurally lower.

And so, again, because they’re backward-looking metrics, I think we have to incorporate that into our thinking and just make sure that we’re looking at valuations on an absolute basis. We look at them relative to history, but we also have to think about how the sector will be perceived going forward.

Bigda: Matt, what do you, do you sort of agree with that viewpoint, or how do you see energy and where we are in the market cycle?

Peron: Yes, so I do agree with what Noah was saying around some of the factors that’s keeping valuations at bay. But I would say that, that’s feeding that skepticism that I spoke about earlier. And I think if you ask the general market participant, where is peak demand? Their view of that is probably shorter than our view of that, meaning more near term than our view of that, as Noah articulated earlier. So, that’s what we think is temporarily keeping valuations, especially in upstream, lower than they would otherwise be in prior cycles. I think that creates an opportunity if you’re a contrarian. So that’s interesting to us.

But pivoting to the cycle, that is one concern that I would have around the performance of energy equities, which is to say it’s got the wind at its back in terms of the supply/demand picture, as we’ve discussed. It’s got attractive valuations. But in a rising interest rate environment, they [rates] are typically a headwind for energy equities. They’re not considered a late-cycle play. So, if you’re in the camp that the Fed [Federal Reserve] has to be much more aggressive, and there’s some case for that, that could be a headwind for energy equities here. So, you will see some volatility. I think once we get past that volatility, there’ll be some room to run as the cycle is probably going to be longer than people think – the overall economic cycle. And I think energy equities are well positioned to participate, if not outperform, in that backdrop.

Bigda: Since we’re talking about the energy sector, price volatility is an inherent part of it. Oil and gas prices go up, but they also very quickly can go down. And you know, what would be the potential impact of a drop in oil prices? How low can they go before the sector begins to struggle again?

Barrett: If oil prices dropped, you know, $10/barrel overnight, the energy equities would almost certainly get hit. And so, it’s kind of a fallacy to think that the correlation between oil price and the stock prices of energy companies have somehow become disconnected. That’s certainly not true. But if you take a step back and you look at the overall value proposition, even if you took $10 off the oil price, maybe even $20 off the oil price, many companies that we look at still can deliver a pretty attractive return proposition. So, these companies, because they’ve done such a good job of improving their financial health, they can cover capex and base dividends even at oil prices as low as $40 or $50/barrel. Some companies will generate excess free cash flow on top of that, enabling them to give additional cash back to shareholders, you know, either through share repurchases or some type of variable dividend component. So, I think that’s the main takeaway for me is that because the companies have gotten so much better, we shouldn’t be as scared of oil price volatility as we have in the past. And you know, while a $10/barrel move would certainly be eye-popping on any given day on a percentage basis, it doesn’t really take away, again, from a total return perspective how attractive I think the sector is.

Bigda: By the same token, the sector can run into trouble if prices get too high. What do you think that number is today in terms of crude? You know, what would happen if oil reaches that?

Barrett: I don’t know if there’s a magic number at which, you know, some oil price becomes too high. My general feeling is that we begin to see signs of demand destruction at $120/barrel oil. You know, certainly, if we were to breach $150/barrel that would be a negative sign for demand. I think people have very visceral reactions to the prices that they pay on a daily basis, too. When, you know, I’m thinking about prices at the pump. When someone goes to fill up their car with gasoline, you know, if they see a four handle at the pump, that triggers something in them. It’s a very different reaction than if they see something in the high $3 range, even though we might be just be talking 20 cents/gallon, and you know, a couple dollars overall on their gasoline bill. So, you know, looking back to history, the last time we saw U.S. average gasoline prices above $4/gallon was 2008. If you take into [account] the impact of inflation and adjust that for today, that would suggest that people could absorb gasoline prices as high as $5.20/gallon before they started to change their behavior. But, again, as I mentioned, I think people in their everyday lives don’t necessarily think about things on inflation-adjusted metrics. And so, it does concern me a little bit if gasoline prices at the pump start to get materially above $4/gallon, I think that’s a level where behavior does change.

Bigda: And Matt, maybe just briefly, if we could take a step back and look at the broader economy, how does energy factor into your outlook around inflation? And especially, also, the industries that rely on oil and gas as a major input, such as airlines and cement and steel and fertilizer manufacturers, just to just to name a few.

Peron: Yes, there’s no doubt that energy is a tax on and a potential governor to economic activity. It’s an input cost, as you mentioned, and so we are seeing signs of structural inflation. Our companies we watch are calling it out all the time. Some are able to pass on pricing, some not. So certainly, having an impact. It’s obviously caught the Fed’s attention, given their [policy] pivot, so it’s an issue. One thing I would caution people to note on that’s different from say the 1970s, where people, where energy prices brought the economy to its knees, our energy intensity is much lower than it has been. We’re able to go and do more with less. And I see some people revisiting their 1970s playbook, and I don’t think it’s going to be quite the same. So, I think there’s some good news there, but what is overall a negative to the economy.

Bigda: So, finally, we’ve touched on this or hinted at it a few times during the discussion, but what about the potential for long-term volatility created as alternative energy sources take share away from traditional fossil fuels? Do oil and gas companies have a role to play in that transition in the long term?

Barrett: Yes, I certainly think that traditional oil and gas companies have a really important role to play in the energy transition, for a couple of reasons. First, I think the transition will take longer than expected. Going back to our, you know, our conversation on the outlook for long-term oil demand, I think it’s going to take a long time to get off of oil. I think one super interesting stat that maybe people don’t really think about is, you know, the world uses almost 1,200 barrels of oil every single second. And so, hydrocarbons are a part of our lives in so many different ways, not just transportation fuels but plastics, fertilizers, industrial production, heating and cooling our houses and buildings. And so, I think it’s just when you have a country or a planet that has built their infrastructure around the utilization of fossil fuels, it just takes a long time to transition to a new system.

I think another important point is that many oil and gas companies, they have core competencies in what they do that they can leverage to be part of the energy transition. So many of these companies have expertise in handling different types of fuels or gases. And so, if hydrogen is the fuel of the future, that’s something that oil companies, energy companies touch and transport every single day, and so they know how to do it. If carbon capture is a solution for how we get to a 1.5 degree [Celsius] scenario you know, well that plays into the energy companies hands as well because they have expertise in carbon capture and they know how to do it. And maybe most importantly, they know how to do it at scale.

So, putting that all together, I think it would be a mistake to say that a large oil company or a large energy company, all they can do is oil and gas. I think they can be really well positioned to take advantage of whatever new technologies or new processes come to bear that help us get to a world where we’re using more renewables and moving away from fossil fuels.

Peron: And natural gas used to be embraced as the cleaner and greener alternative to oil. That fell out of favor a little bit. I wouldn’t be surprised if that comes back into vogue because it really is an attractive fuel that can offset or reduce some carbon emissions.

Barrett: Yes, one phrase I like is, don’t let perfect be the enemy of good. And so, natural gas, as Matt highlighted, is a much more emissions-friendly fuel source than coal. And so, many emerging economies are so dependent on coal, and so if they can just transition off of coal onto natural gas, that would reduce their carbon footprint immensely. And you know, I think long term, we can all agree that it’d be great to get to a world where they’re using renewables, they’re using wind and solar instead of natural gas. But that takes a really long time, a lot of capital. The technology isn’t quite there yet, you know, in some ways and the infrastructure isn’t quite there. So rather than focusing on trying to be perfect immediately, I think there’s a real case to be made that fuels like natural gas, you know, can be a bridge to help us get away from coal to renewables and can play a really important role and a pretty long-duration role as well.

Peron: And America’s playing a very central role in being an exporter of natural gas. It’s a key theme we’ve been watching as that, you know, continues apace. So, I think that’s another podcast for another day, perhaps, but that’s a really important story that Noah is highlighting there, especially around emerging economies.

Bigda: So, just as the oil and gas industry has evolved since the 1970s quite a bit, we should probably expect to see a lot more evolution in the decades ahead it sounds like.

Noah, thanks for taking the time to speak with us, and thanks to our listeners for tuning in. We hope you’ll join us again for more episodes of Research in Action. I’m Carolyn Bigda.

Peron: And I’m Matt Peron.

Bigda: Until next time, thanks for listening.


1Organization of the Petroleum Exporting Countries (OPEC) is an organization of 13 major oil-producing countries that aims to coordinate global petroleum prices. OPEC+, formed in 2016, includes 10 additional countries. 


Energy industries can be significantly affected by fluctuations in energy prices and supply and demand of fuels, conservation, the success of exploration projects, and tax and other government regulations.
Natural resources industries can be significantly affected by changes in natural resource supply and demand, energy and commodity prices, political and economic developments, environmental incidents, energy conservation and exploration projects.
Emerging market investments have historically been subject to significant gains and/or losses. As such, returns may be subject to volatility.
Volatility measures risk using the dispersion of returns for a given investment.
S&P 500® Index reflects U.S. large-cap equity performance and represents broad U.S. equity market performance.

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Matt Peron

Matt Peron

Director of Research | Portfolio Manager

Noah Barrett, CFA

Noah Barrett, CFA

Research Analyst

Mar 10, 2022