The New School of Energy Sector Investing

And I know energy has been not one of the most exciting sectors to be invested in over the last several years, but Rob's gonna make a more exciting for us in this episode of What Does It Mean? Because he's gonna talk about all the different opportunities that are there, he and, what makes the sector exciting now.

So please stay tuned. Turn it. Tune in with us. We'll be right back after this break. All right. Welcome back everybody. Like I mentioned, we've got Rob Thummel here, senior portfolio Manager at Tortoise Capital, and we are so excited to talk to him about the energy space right now. What a time to be here. Rob, welcome to the show.

[00:01:05] Robert Thummel: Thanks for having me.

[00:01:07] Lindsey Bell: Of course. I wanna get your, I wanna start big picture here with you about the energy sector in general.

When I look at it from an S&P 500 perspective, it's, fallen dramatically since the, everything's fallen dramatically since February 19th. but we're looking at a deeper decline. Then the overall market for the energy sector. it, year to date, it's done better though it's fallen in line with the market.

at least, through the recording of this, how do you see the energy market? I know you've got lofty expectations for 2025. How do you see the, energy market turning itself around

[00:01:44] Robert Thummel: Sure Lindsey. yeah, if you look back and say, what's the energy market? How's it done? and why has it gone down?

most recently oil prices have fallen, so oil prices have fallen. More, more so because there was concern or that we may potentially we're gonna have some political uncertainties that are gonna cause a recession. and energy is pretty much tracks in terms of energy demand. It pretty much tracks with, the GDP and GDP growth.

And so if we're gonna have slower GDP growth or even a recession, that could have a negative impact or perceived negative impact on, the energy sector. Now, I would say you gotta, zoom back out of that and realize that the, that energy demand does typically go up. It's gone up, I think 41 outta the last 42 years.

Something just crazy like that. So ultimately energy demand usually recovers, but in the short term, you have these, short term blips. Now, if you look across the energy sector though, oil and gas stocks in the energy sector have actually traded off, but energy infrastructure stocks actually have held in and actually outperformed the sector.

We can talk a little bit more about that if you'd and why, but a lot of that reason is because there's not as much commodity price sensitivity, for the, in the energy infrastructure sector relative to the.

[00:02:52] Lindsey Bell: Yeah, no, I think we're definitely gonna dig into that. But let's, start still state that high level for a couple more minutes.

I wanna talk about the supply versus demand story, because you're absolutely right. It's the price of oil that drives these, the sector overall, primarily. We've got, WTI under, 68 bucks a barrel or 70 bucks a barrel. and it's a supply and demand story. And like you said, when we think about AI, right?

When we think about the energy needed to drive the AI story. the, demand should be there, And then from a supply perspective, OPEC is, back and forth. I think they're back on with the supply situation. But, offsetting some of this is, the demand, the, economic demand, like you said.

What's happening in China, what's happening here in the US. And then from a geopolitical perspective too, that all plays into, the, to the game. So from a supply and demand perspective, what's gonna be the driver of, say the energy sector in the next three to six months versus the next nine to 12 months?

[00:03:58] Robert Thummel: Yeah, no, that's a very good question. So the next, so the energy sector in general, so let's just talk about oil. So when you think about energy sector, most people gravitate to exactly what you just said. They think about oil prices, gasoline prices, right? And so they look at supply and demand and you say, okay, oil demand goes up about a million barrels a year.

It's been, plus or minus that or not, plus or minus, several hundred thousand for for a while of a million barrels a year for, quite a while, except for obviously 2000 and the financial crisis as well as COVID. But, but generally speaking, the supply in the US has been growing, supply internationally has been falling. Now we're gonna bring oil, oil supply back from OPEC. The, markets maybe that, oversaturates the market. We have too much, oil supply that's caused the price to fall. And as, as we all know that, think the president and others want the price to come down as well.

So, that can curb inflation. However, what we think and, we'll see what happens over the next three to six months. What we think longer term that the really, the energy sector is really being redefined by, what you mentioned is AI and what AI is going to do is actually boost the demand for natural gas. So the future of energy is less about oil.

And it's more about the demand for natural gas, because natural gas is the primary, fuel source to generate electricity. And as you all, and everyone knows, we need a lot more electricity to, to basically power all of these data centers that are gonna generate all of this AI demand into the future.

so from our perspective, we're looking more at what's gonna happen with natural gas, less what's gonna happen with oil, really to direct the sector going forward.

[00:05:30] Lindsey Bell: so when you think about natural gas, you look at natural gas prices, they've been on a tear, right? the opposite direction of oil prices.

And so everybody is anticipating this AI revolution. The question is, what inning are we in? I think most people think we're in early innings, especially when you think of it from an infrastructure perspective. is there still opportunity from an energy infrastructure perspective to get into these investments now or have they been overpriced because everybody knows that's where you should go?

I think I saw a stat that over $2 trillion has already been invested in, the energy transfer.

[00:06:08] Robert Thummel: Yeah, so, what I think is gonna happen is the answer to short answer to your question is no. The, we still think that we're still really in the early innings on the energy infrastructure side, right?

So there, there is no AI without energy infrastructure. And so I, like I said, there's no AI without EI. And this is why, because, the data centers need electricity and electricity that's reliable, that's available 24 hours a day, seven days a week. What's the best fuel supply to provide that? It's natural gas, but so you need the natural gas

from the producers. But then you need even more importantly, the energy infrastructure, the pipeline network. We've got the largest pipeline network in the, world here in the US and almost all of those pipelines are owned by publicly traded entities. We can all invest in them, and so you need that infrastructure network to, to move the natural gas

to generate the electricity. That really hasn't started much. We haven't seen much volume. We haven't seen many new projects. We just started to hear some. Williams companies announced one recently. Energy Transfer announced one recently. so we're just getting started there. That said, the energy infrastructure sector still trades,

trades from a, fund or from a valuation perspective, at a discount to where it's traded at historically. So when you look at the energy infrastructure sector, you can get a 5% dividend yield, in some cases, even a little higher than that. You can get 5% to 7% growth in that dividend. Which is, pretty good.

Couple percent buyback. You can easily get yourself to, a market return that's, above and beyond kind of the historical long term average of 10%, but from the broad market. And then you factor into that, we still think that really the essential nature of these assets, the economic moats as these, that these energy infrastructure assets, really, can command even higher multiples.

So you get a little multiple expansion. There's still a lot of room here, we think for, really good returns from this sector.

[00:07:51] Lindsey Bell: Okay, so you're very excited about this sector. I want you to share some names too, but also it's an interesting topic to talk about right now, given the volatility in the markets.

And, from my perspective as a, an broader market strategist, what I always look at is in periods of this, you've gotta stay invested. It's not about getting out. 'Cause some of the biggest up days are usually followed by the biggest down days. And so if you're trying to time the market, you end up losing out on the longer run.

And these, it's. This is an interesting sector, again, with the dividends, with the buybacks, and even you're saying the valuations are still attractive, right now. this could be a sector that, not that it's immune from downside, a downside market that where everything is moving down. but there seems to be more opportunity here.

So what are you investing in or are you invested in? Are you buying here? Are you waiting for low, lower levels? Give us some names.

[00:08:44] Robert Thummel: Yeah, so we have a mutual fund, the Tortoise Energy Infrastructure. it's an open end mutual fund, and so some of our bigger names and positions in our companies like Williams that I mentioned earlier, so Williams, it's say, Williams and Companies.

What do, you know about Williams and Companies? Well, it's one of the largest natural gas pipeline infrastructure networks really in the US. It owns some of the most strategic pipelines. These pipelines run through multiple states. I think it's probably 10 states in one particular case of their pipeline.

So just think about that. You can't rebuild these assets. That's why I would say all the companies like Williams and Energy Infrastructure have these big economic moats. 'Cause you cannot replicate these assets. it's gonna be really expensive and take a long time to do that. So we like companies like that, that, where their primary business is

natural gas infrastructure, where they have large diversified, pipeline base. And so that's a company like Williams. And as I mentioned, they just announced a $1.6 billion new pipeline that they're actually going, that's gonna support new data center development. And so they're gonna do what is called behind the meter.

And, that's my, a technical term, but effectively all it means is they're gonna be actively involved in the construction of pipelines to, to help, really, increase the amount of data centers and the amount of, of electricity that's needed for these data centers going forward. So that's one example.

[00:09:59] Lindsey Bell: Well, that's a great example.

Talk to me too about, we haven't talked yet about President Trump and his energy policy and how that's gonna impact your investment in this space and how you look at the traditional energy companies versus the natural, the natural gas companies versus the infrastructure companies and so on and so forth.

what's the most important aspect of the Trump policies? What's the timing? What's your anticipation and how it's gonna be reflected in these stocks if it's not already reflected?

[00:10:30] Robert Thummel: Yeah. Yeah. and I don't think it is. And you raised a good point. So I think energy dominance is the key theme of, President Trump and, secretary, and the Secretary of Energy, Chris Wright's, policies right now.

and, what I mean by that is, if you think about where the US sits, we're, in a really, good position. 'cause the US is the largest producer of oil and natural gas and really energy in the world, but also the largest exporter of energy in the world. That's we've. that's a kind of an area that really is, where we weren't several years ago.

And now we are the largest exporter. We used to be a big importer. Now we're the largest exporter in the world. So so a company like, Cheniere Energy that, exports liquified natural gas. So the LNG liquified natural gas export trade has become its own industry. today the US is the largest LNG exporter in the world.

we think that's part of the policy is to expand LNG exports even more. So a company like Cheniere, who's the, who's really the, best way in the market to play a pure play LNG exporter, is an example of, a way investors can get exposure to that growing theme. We think if you look at a company like Cheniere, it's gonna grow, its EBITDA next year, 10% a year, it's gonna grow its dividend at least 10% next year.

It's. It's, it's, gonna buy back a decent amount of, of, of its share with its excess cash flows. Pay you a little bit of a dividend. So it's got a lot of those characteristics investors are looking for. but, it's in an area that's really gonna be supported not only just, fundamentally domestically, but also globally as well.

[00:11:56] Lindsey Bell: let's talk about the risks to the sector too. I can feel your energy about this and I love it, and it's really amazing. but the tariffs, how do they play into it? We saw, like I saw today, that, Ontario is raising electricity prices by 25% for Miss Minnesota, Michigan in New York.

And I know that might be more of a symbolic thing than anything because they, they could choose the price that they pay. or where they get it from is what I mean. But, but how do tariffs play into this LNG play to the natural gas, and just our relationship with Canada and our energy infrastructure in general.

[00:12:36] Robert Thummel: Yeah, so the good news is from a, from an LNG perspective, we're mostly exporting, not importing much, but to your point. So we, but it will, it could impact things in, in places like China, right? China's a big, importer of, and we export a lot of, LNG to, to China. But what is China going to reciprocate?

And I think they are going to put some, a tariff of their own on US, natural gas that's coming into the country. And will that impact demand? The good news is the US, that's a small piece of the US LNG exports. It's probably less than 10%. It may even be less than 5%, today for some companies. Like, Cheniere. The opposite way though,

that is, is, another good question that you have though, is because what, where the tariffs are gonna impact us is the 4 million barrels a day that come in, that we, as the US import from Canada. So that, so, who's gonna pay for that? Is that gonna ultimately be paid for by the Canadian producers?

Is it gonna be paid for by the US refiners or is it ultimately gonna be paid for by in, in the US gasoline price? And so we're gonna figure all of that out from our perspective. We think it'll probably be, be a little bit of, all of the above. The Canadian producers will probably have to have lower margins because they'll have to eat a little bit more of the tariffs.

And, the, US refiners will probably see their margins shrink just a little bit. And then ultimately gasoline prices might, rise just, a tad bit as well. once again, this all depends though, that we're, talking. If the, duration of this tariffs is multi months or maybe even multi-year, not necessarily, this short period of time that, that, that hopefully we, we end up with these tariffs.

[00:14:07] Lindsey Bell: I was gonna ask you, and I don't know if you have an answer to it, but I was gonna ask, what do you think the, ultimate, impact is gonna be from tariffs? what is gonna be the rate, what's gonna be the length of time, as it, at least as it relates to energy and oil?

[00:14:22] Robert Thummel: Yeah. I, think

[00:14:23] Lindsey Bell: on Canada?

[00:14:24] Robert Thummel: I think Yeah, and so there, Practically, there are lots of steps that Canada can take, initially. in other words, so, I think the tariffs, I think 10% now, you know, it's less, lower than what the, what the base rate is. Or what the standard rate is going to be from Canada on on oil in particular. But what, what Canadian producer will first is, they'll, export some, oil outside of the US so that they don't have to pay the tariff.

that's a, they have a little bit of capacity there. Not a lot, not 4 million barrels a day by any means. Maybe a couple hundred thousand barrels a day so that they'll fill up inventory in Canada. So they don't have to pay the tariffs yet. and that'll take a few months. But, these tariffs won't, we probably won't see an impact of the tariffs.

Oh, probably until June, July, August timeframe is what I would guess in terms of on, on prices. and so that could be offset. the, higher a price implied because of the tariffs could be offset by more inventory coming on from Saudi Arabia and other OPEC countries as well, because oil prices could fall as a result of that, even though they might rise because of the tariffs.

So you've got these two, counterbalancing measures that are in place and, we'll see it play out. Ultimately, I hope it doesn't raise the, price for the, of gasoline to to, the consumer, and I don't think it's gonna have a huge impact.

[00:15:39] Lindsey Bell: that's, I think with all of these tariffs across the board, there's so many puts and takes. And potentially, hopefully on the other side of this tariff negotiation, which, a reminder to listeners that a lot of these, these these are negotiations at the end of the day for policy, broader policy objectives by the Trump administration.

but there's a lot of moving parts because if we do get past this. Hopefully the focus is gonna return to the, pro growth policies that boosted the stock market coming into the beginning of this year. so let's talk a little bit more about some of the, opportunities that you see in the energy market.

I know you talked about Williams. I know you talked about Cheniere. What about, Energy Transfer? What's the opportunity there? I know it's like one of the ones that you wanted to cover.

[00:16:25] Robert Thummel: Yeah, I do. And this is why, because you know there's a lot investors out there. you mentioned there's a lot of uncertainty I mean right right now maybe temporarily. but, what is certain in a lot of cases, and you highlighted this is dividend yields, and that's, and when you can find companies that provide really solid, dividend yields, that, that have a history of that and, can provide that certainty, I think that's attractive place to, to, I'm gonna call it hide out, but maybe wait

and invest in these areas. And Energy Transfer is a classic example of that. It's al, it's got a 7%, 7.5% dividend yield right now, which is, pretty attractive relative to other, yield oriented securities. It's gonna grow that dividend 3% to 5% a year. and, once again. They own a bunch of energy infrastructure assets.

They, and, they're a little more diversified. They don't just necessarily own natural gas. They own a, little, bit of oil, a little bit of natural gas and a little bit more of what's called, NGL Natural Gas Liquid. So they own a diversified set of energy infrastructure assets. Once again, huge economic moat.

You can't replicate this, network, that energy transfer. has built basically in, in terms of its pipeline network. It would be nearly impossible or, and be, and not cost effective by any means. great management team. The company's founded by Kelsey Warren, who's a CEO and, a true American entrepreneur who's done really well, in building up this company.

And, like I said, 7.5% dividend yield, 3% to 5% growth. that's a pretty good place to start in really uncertain markets because I think that dividend is pretty certain as well as the growth as well.

[00:17:54] Lindsey Bell: All right. So I wanna just tie a bow on this. Your estimate for the energy sector to increase 12% in the calendar year 2025.

Like we discussed at the very beginning, the biggest component of the energy sector is oil and gas. They have this massive weight, Exxon, Chevron, in the sector. So to me that assumes you have to, assume some increase in oil prices, or at least some. Some, something positive out of the, this part of the energy sector.

So how do you get to 12%?

[00:18:26] Robert Thummel: Yeah, so if you just talk about oil and gas producers, they're a three or 4% dividend yield. They're, some of these companies though, let's just say oil prices stay in that $60 to $80 range. Let's say, let's, if they drop below $60, I think, our estimate, at least on oil and gas producers would change a bit, but at least temporarily.

But let's just say it's $60 to $80 range. They're gonna still be able to grow the dividends. They could grow the dividends, 3%, 4%, 5% themselves, even in that lower oil price environment. but the thing about the oil and gas producers, the Exxons, the Chevrons and BP, they've got a, still got a lot of excess free cash flow Lindsey.

And I think that's important. That's new to the sector 'cause they're not out spending their cash flow and so they'll be buying back stock and when they buy back stock, as you know that, that. That can then ultimately result in the price going higher. Earnings, the PE ratio is adjusted accordingly because of the lower share count.

And that results in potentially a higher valuation for some of these stocks as they start to buy back stock. And so that's probably the biggest driver in the $60, $80 range that's not been there in the past. That, that if you've, looked at the sector in the past, did you say, oh What, am I missing this time?

Free cash flow and the ability to buy back stock. That's, the biggest difference. And that can be the driver, for some of this total return going forward, in addition to the yield, the dividend yield and, some growth that you'll get out of the sector.

[00:19:42] Lindsey Bell: And is that because the break even price for them on oil has been reduced significantly as it continue to be reduced?

I don't know where it is these days.

[00:19:49] Robert Thummel: Yeah. Partially, no, that, partially, but it's also because of the discipline. So you've heard about capital discipline. If you've heard, if you've, talk to or listen to energy producer, people talk about the secondary, say, what does that mean? what it means is there's less capital spending being spent

this year, and even really since 2020, than what was historically spent. So before 2020, lot of excess spending that was above and beyond the operating cash flows of the company. So they didn't have any excess cash to buy back stock. They were just raising either raising equity or raising their debt. Since 2020,

a lot of excess cash. They lowered their capital spending dramatically. And as a result of that, now what you've seen, companies have excess free cash flow that they can utilize to buy back stock in, in these uncertain periods. And so that, that's gonna be, in place. You might find this interesting.

I think this is interesting. If you go. there's a big, debate on what drill baby drill means. And if you just look at the, if you say, okay, are we gonna drill, baby drill? Okay, that's fine. I, think that's a, fair point. but, if you look at the capital spending of all, these major big oil companies and you compare 2025 to 2024. 2025 actually is gonna be lower than 2024 if you adjust for things like acquisitions that they did in 2024. And so the so I don't know if they're gonna necessarily go out and be really aggressive in their capital spending. They're gonna be very disciplined, which provides that free cash flow.

Now, if prices go too high. They'll drill, baby drill because they don't want price. Nobody wants prices to go too high, but prices aren't at a level where I think they're gonna go out and drill, baby drill yet.

[00:21:22] Lindsey Bell: that's, that is definitely very interesting. It's gonna be something to watch too, because I'm a, I keep a close eye on, on earnings and the energy sector, negative earning double digit negative earnings growth

for six of the last seven quarters. So just by a lower bar has been set. So there should be opportunity to, exceed that. and I just, like I said, I love your enthusiasm about the sector. and I love that you think that there's opportunity here. if there was one, one part of the sector or one company that you could buy today, what would it be?

If you could put capital oh one company,

[00:21:59] Robert Thummel: buy one, one company buy today. I'm biased on Cheniere because I've we've owned that company for a long time.

[00:22:07] Lindsey Bell: Okay.

[00:22:08] Robert Thummel: so I, it's got a lot of. here's what, here's what everybody's missing on Cheniere. in the, tech sector, everybody likes to talk about annual recurring revenue.

the energy sector has the same thing. We just call it the, we just call it fee-based cash flow. But Cheniere has an annual recurring revenue where you, can know with relative certainty for several years in a row, if not decades in a row, what's their cash flow gonna be per share. Because it's long-term contracts with existing customers that are, that that, is fee-based.

It's annual recurring. It's, the, high quality customer. So it's really high quality cash flow, but the market is not rewarding It's trading it at, at a discount to the energy sector in general. And so we just think that, these high quality cash flows that the energy sector produces are really under appreciated by the market.

[00:22:54] Lindsey Bell: I think so you don't, hear about the, free cash flow that often when people are talking about the energy sector. is, I'll give you one last, the last word. Is there anything else that we didn't discuss that you wanna cover today while you're here?

[00:23:08] Robert Thummel: I. No, the only other thing other, the only other thing I would say Lindsey, for this, for is, when you think about energy, you also have to think about ai.

Because I've been, investing in the energy sector 30 years and for, the first time in my career. The energy sector and the technology sector, they're really coming together. They're intersecting. You you need the energy sector for the technology. Obviously, for AI to work, you need obviously the technology for the AI to work as well. But energy is gonna be really important. AI gonna be a long secular trend and provides this new growth avenue, and this growth catalyst for the energy sector. So there's a lot of opportunities we think in energy because of this AI development. And it, we'll see where AI ultimately ends up.

It's obviously not gonna be, it's, gonna be a little choppy on its way up. But what we do know is, you've heard about the strategic petroleum reserve, for oil and gas. the US is probably gonna have the strategic. Data reserve, on the technology side. And if you're gonna build all these data centers for this strategic data reserve, you're gonna need a lot of electricity.

You're gonna need a lot of infrastructure, energy, infrastructure to make all of that electricity generate. So we're excited about that, that, that side of it and, see that, to see that develop as well.

[00:24:14] Lindsey Bell: I definitely think technology is breathing like a new sense of life into the energy sector and, into investors in this sector.

So thank you so much for your time, Rob. We're so glad you were able to join us today.

[00:24:26] Robert Thummel: Thank you, Lindsey.

[00:24:28] Lindsey Bell: All right. There we have it. Rob Thummel, what energy did he have? It was amazing. I haven't been as excited about the energy sector as I am now. After speaking with him. Usually in this section we talk about what we learned. I think Rob gave us so many different interesting investing ideas, getting very specific because we hear so many people talk about.

investing in energy for the AI revolution. but he put a little bit of a different spin on it. he talked about the old school nature of the industry, and how it's evolving itself into the new school as it connects to technology. I. And it really is a sector that has always been focused on dividends, but now is much more focused on cash flow, which he likened to in some instances as recurring revenue.

So I think that he made some really interesting points about the energy sector. I'm gonna take a second look. I hope you will. Again, he gave us some really great ideas. and so I hope you enjoyed the conversation as much as I did. If that's gonna do it for this week's show of What Does It Mean? We'll have Chris hopefully back with us next week.

in the meantime, you can find me at clearnomics.com or on LinkedIn. Have a great rest of the week.