Four Questions With | Simon Lack on the Oil Markets

Four Questions With…Simon Lack on the Oil Markets

This week we’re introducing a new series named “Four Questions With” in which we discuss topical market events with an investment professional from the Catalyst and Rational network.

Last week U.S. President Joe Biden announced plans to release even more oil from the country’s reserves to help alleviate rising gas prices. Given the war between Ukraine and Russia, the relevant sanctions, and the ongoing rally in commodities all making headlines, we thought we’d kick off this series of “Four Questions With” Simon Lack, Portfolio Manager of an energy infrastructure strategy.

Catalyst: President Joe Biden announced plans to release up to 180 million barrels of oil from reserves to help alleviate gas prices. Do you see this as having an actual impact on the markets or is it more of a plan to appease the public?

Simon Lack: For energy investors like us, Biden has been a huge improvement. [Former President Donald] Trump knew he wanted lots of production to keep prices low and promote American Energy Independence. Executives were emboldened by a government they perceived as supportive. The results were good for consumers but ruinous for investors. Although the correlation between the price of crude and pipeline stocks isn’t as strong as many think, rising prices that reflect strong underlying demand have boosted returns. For the quarter just ended, the pipeline sector returned +24.6% versus –4.5% for the S&P500.

Catalyst: Commodities just finished their best quarter in more than 30 years. What’s behind this drive and how long can this continue?

Simon Lack: The Biden Administration and [climate change activists] have actually been good for the energy sector through their discouragement of new pipelines and new oil/gas production. Stock buy backs and free cash flow are increasing and thus supporting higher dividend yields. Emerging economies are now demanding more natural gas to support rising living standards. Due to the sector’s link with commodity prices, it has provided good inflation protection as well as attractive income.

Catalyst: How has the latest developments in the Russia/Ukraine conflict impacted the way investors should view the natural gas markets?

Simon Lack: U.S. shipments of Liquified Natural Gas (LNG) have been heading mostly for Europe so far this year — initially because Russian pipeline deliveries were mysteriously lower than expected, and more recently as western Europe slowly disengages from Russian supplies. Many US LNG contracts allow flexibility on final destination, which has allowed flows to be diverted to Europe where prices are highest. This is despite the fact that China is the world’s biggest buyer of LNG, with Asia representing 75% of global LNG trade. Europeans have had to compete on price to acquire needed supplies, at times driving European LNG prices to 10x that of the U.S. Reflecting the positive fundamentals, Cheniere, the leading LNG exporter in the U.S., raised 2022 EBITDA guidance by 20% and Distributable Cash Flow guidance by 35% when they reported 4Q earnings recently. Europe is inevitably reassessing its energy security, which will permanently lower its dependence on Russia. The U.S. including our pipeline companies, are well positioned to benefit from this.

Catalyst: Given market conditions, which sub-sectors of your coverage areas do you see outperforming and underperforming?

Simon Lack: The American Energy Independence Index (AEITR) has been outperforming the S&P500 ever since its March 2020 COVID low. The European reassessment of energy policy triggered by Russia’s invasion has given AEITR a further boost, so it’s now recouped all its relative underperformance since pre-COVID. The last few weeks’ events make an investment in the sector even more compelling.

Learn more about Simon’s energy infrastructure and inflation growth strategies.