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  • Roger S. Conrad

Energy Returns are Rising, and the Best is Yet to Come

By Roger S. Conrad on Oct. 18, 2021

Last week, North American benchmark crude oil prices hit their highest level since October 2014. And while natural gas has backed off from this month’s peak, the fuel continues to trade a stone’s throw away from its highest price since mid-2008.

These higher commodity prices are the inevitable consequence of years of underinvestment in oil and gas production and infrastructure, which in hindsight really stretch back to when oil traded comfortably over $100 a barrel in mid-2014. Nonetheless, we still expect energy companies to hold the line on spending when they update their guidance over the next few weeks.

There are multiple reasons for management teams to keep maximizing free cash flow at the expense of CAPEX, even with energy prices surging. One is investors are still punishing big spenders. Another is aggressive government action to restrict fossil fuels, such as the ban on hydraulic fracturing approved by Monterey County, California voters and recently struck down by a state appellate court.

Drilling for oil and gas drilling on federal lands is still very much in flux. And the cancellation of the long-delayed Penn East Pipeline to bring Pennsylvania gas to New Jersey is just the latest demonstration of how difficult it is to build energy infrastructure, even where producers desperately need capacity to ship output.

Energy politics is also a key cause of oil and gas stocks’ continuing stark underweighting in portfolios of major investment funds. So is the dramatic disconnect between public perception and reality of how quickly renewable energy and electric vehicles can replace fossil fuels—with even the most aggressive forecasts acknowledging there’s no way natural gas use won’t rise by 2050.

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    • Elliott H. Gue

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor

    • Roger S. Conrad

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor