3 (Possibly) Shocking Energy Forecasts for 2024

And how stock investors will profit

New Year’s is when everyone makes forecasts. And since our Energy and Income Advisor model portfolio beat the S&P 500 Energy Index by 17 percentage points in 2023. I’m feeling justified making a few for Substack readers as we head into 2024. So here goes.

Forecast #1: The energy sector is going to do a lot better in 2024 than current consensus forecasts. And a well-chosen portfolio of energy stocks is going to add significantly to the gains we’ve already enjoyed in each of the last three years.

This prediction has nothing to do with geopolitics, though there’s plenty that could trigger a spike in either oil or natural gas prices—including an extremely ill considered invasion of Guyana by neighboring basket case Venezuela. Nor is it isn’t related to US politics, despite one candidate’s promise to “drill, drill, drill” by presidential decree if elected.

Rather, it has to do with an unfolding energy up-cycle that’s still in its very early innings.

Normally, three years plus into an up-cycle—this one started in late 2020—we’d be seeing at least some reasons for caution. And to be sure, some of the stocks we’ve favored at EIA have already run up enough at times to merit taking some money off the table, to reinvest at lower prices later.

But the fact is investment in oil and gas remains considerably more conservative than it’s been at this stage of previous price cycles. Some commentators have been making a big deal out of the new US production records set over the past year—October output of 13.248 mb/day noted by the Energy Department was only slightly less than the September all-time high of 13.252 mb/day.

But these output gains aren’t the result of massive new capital spending on reserve exploration and development, as was the case at the peak of the previous price cycle in 2013-14. Rather, it’s because producers are doing more with less by increasing efficiency, and thereby maximizing cash flow to strengthen balance sheets and reward shareholders with dividends and stock buybacks.

The discipline of North American shale is 180 degrees distant from the free-spending days of the previous decade. It was forged in the deep energy sector bear market of 2024-2020. It persisted in 2022 despite spiking energy prices, and was reinforced by lower prices in 2023. And investment remains challenged by hostile capital markets including the movement to divest fossil fuels—even as regulation continues to tighten on the federal, state and local level, with court actions an omnipresent threat to delay any large project.

Bottom line: Investment continues to lag previous cycles by a wide margin. That means supply is falling ever further behind underlying demand growth, making higher energy prices inevitable. And that’s bullish for energy producers as well as midstream and services companies.

The S&P 500 Energy Index beat the S&P 500 by 84 percentage points in 2022. It lagged the broader average—which is currently dominated by the Big 7 US technology companies—by more than 27 points in 2023. I look for outperformance to return in 2024, with diversified portfolios of well-chosen energy stocks doing even better.

Forecast #2: The great global solar build will continue to accelerate including in the US, though China will lead the way.

If you participate in energy discussions on X as I do, you’ll quickly see that many see the question of electricity generation sources as a quasi-religious question. That means exalting whatever they favor and doing their best to denigrate everything else.

That’s of course not how decisions are made by those charged with running power grids, which in roughly two-thirds of the states are vertically integrated regulated utilities. Rather, management teams try to ensure a proper mix of sources that will provide the most reliable energy at an affordable cost, even under the most extreme stress systems.

Over-reliance on a single fuel source is not considered best practices because it opens up a whole new set of risks. That’s what Texas discovered during Winter Storm Uri in 2022, when sudden weather-related shocks to supplies of natural gas sent wholesale prices spiking and threatened service when it was needed most.

Nonetheless, it is a fact that the stars sometimes align in favor of accelerating investment in a particular source. And at this point, that’s solar, which is currently the cheapest it’s ever been to install thanks in large part to plunging component prices and extremely favorable tax incentives. In addition, utility scale facilities can be sited, permitted, contracted, financed and built years ahead of any other power source.

The residential solar business took a massive hit in 2023 from the Federal Reserve’s upward push on interest rates. Mainly, companies lost their ability to offer buyers cheap credit and demand cratered.

A recession in 2024 could conceivably make things even worse for resi solar companies, including a wave of defaults on loans to current customers. But their pain is pure profit for utility scale developers, who have far less competition for construction crews as well as components.

For utilities, ability to invest full bore in solar is key to executing the CAPEX-led growth plans behind guidance earnings and dividend growth. And that leads me to Forecast #3 for energy in 2024:

Wall Street analysts are going to get it wrong on US utilities in the coming year, just as they did in 2023 and before that in 2022. That means no earnings Armageddon as so many predicted would be the result of rising interest rates and customer concerns about affordability.

The utility sector saw a decent rebound starting in early October. But the Dow Jones Utility Average still finished the year down -5.2 percent including dividends. And the industry’s biggest names did far worse, for example NextEra Energy (NYSE: NEE) wound up under water by more than -25 percent—also despite a Q4 rally.

I look for that underperformance to reverse with a vengeance in 2024—as companies prove their resilience as businesses and the Federal Reserve pivots from raising to cutting interest rates.

Borrowing costs for major utilities have in fact already fallen sharply: NextEra Energy’s 30-year bonds now actually trade with a lower yield to maturity than where they began 2023. It shouldn’t be too long before the stocks follow their bonds to much higher levels.