Energy: The Bull Market is Alive and Well

And wrong-headed sellers are handing latecomers a chance to get in.

Hopefully you saw it at the pumps this weekend. But benchmark North American crude oil prices are once again less than $70 a barrel. And at least some investors are convinced it’s the beginning of the end for the energy upcycle that kicked off in mid-2020.

Rest assured: It’s not. In fact there’s a very attractive silver lining for investors who are still light on energy stocks.

Mainly, misplaced fears have caused selling, driving down prices of best-in-class energy stocks and setting up another great buying opportunity. And that includes midstream energy stocks, some still offering safe and growing yields of 8 percent as up.

Midstream energy companies basically do everything that takes place from the time oil and gas are pumped out of the ground to when finished products hit the market.

Networks of small pipes and related equipment “gather” the raw commodity from wells. Processing facilities and compression equipment prepare products for transport to markets. And pipelines, shipping and related storage facilities move useable products to market, from oil and condensate to “dry” natural gas and natural gas liquids like propane and ethane.

At every step of the way, midstream companies collect fees. Some are affected by commodity prices and the volumes shipped. But increasingly, most contracts are capacity based or “take or pay,” meaning the cash comes in at a set rate, often with escalators tied to inflation.

The result is robust, rising and very reliable cash flow for midstream companies. That means generous, growing and equally reliable dividends.

And unlike much if not most of corporate America, midstream companies live within their means. That means funding capital spending, debt service, and dividends with operating cash flow, rather than trying to sell stock in increasingly unsettled markets—or borrowing more money at a time when the Federal Reserve is holding interest rates higher for longer.

Bottom line: Midstream companies are not only just set for reliable long-term growth. But they’re among the industries best prepared for a potential recession as well.

We saw all of these strengths and more in leading midstream companies’ Q4 results and guidance updates. After 20 years of flat to no growth, US electric utilities are seeing their biggest demand increases for electricity since the 1960s. And as earnings call after earnings call attested in Q4, the cheapest and fastest way to meet it is with a combination of wind, solar and natural gas—with gas set for preferential treatment by the Trump Administration.

So why the doom and gloom?

Part of the blame must go to a fundamental misunderstanding of what “drill baby drill” actually means. Mainly, since November’s elections, there’s been a persistent narrative in the investment media that Trump administration policies will inevitably mean overproduction of oil and gas.

So the story goes, that will lead to oversupply. And that in turn will tank oil and gas prices, sinking energy company earnings including midstream companies.

That fear seemed to dissipate at least some as energy companies began reporting Q4 results and updating guidance. But it’s resurfaced again with a vengeance as the administration surprised investors with aggressive tariffs, raising fears of disrupted energy markets and slowing demand—especially from leading energy importer China.

I’m not surprised some are buying the bear case now—every bull market has to climb a proverbial wall of worry. It’s only at the end of an uptrend that the naysayers vanish.

And consider this: More money is now passively invested in stocks than actively managed. That means fewer decision-makers than ever are influencing prices.

Fewer people pulling the levers means more volatility. That goes even for stable, dividend-paying energy stocks with decades of reliability, like energy midstream companies. And energy stocks have basically been in rally mode since late 2020, so profit taking is another factor no doubt convincing some to sell.

But what does “drill baby drill” really mean in North America?

Clearly, you didn’t have to listen to that many oil and gas company earnings calls to see management teams are happy with the changed political environment—and that certain Biden Administration cabinet members have left Washington.

The Trump Administration has already acted aggressively to cut regulation of oil and gas drilling, transportation and use in North America—as well as barriers to export. And those changes are worth hundreds of millions of dollars—if not billions—to cutting energy company costs, which means higher margins.

Yet, not one major oil and gas producer in North America announced that it’s ditching shale discipline. Even where production increases are planned, they’re carefully aligned with projections for demand, such as natural gas projects to feed future LNG export facilities and to run power plants. And always there’s consideration of costs—both operating and well development.

No where to be seen is the approach of ramping up production just for volume, as was the case in the previous decade. And so long as that’s the case, there’s absolutely no risk of overproduction cratering energy prices, and energy company earnings. Conservative remains the watchword.

Tariffs are admittedly a bit of a wild card. Congress has handed taxation power over trade to the president. And he obviously has no inhibitions about pulling the trigger, either to impose them or pull them back at the last minute—as we saw last week with Canada and Mexico.

The decision to double tariffs across the board on China has already triggered retaliation. And that includes counter duties on US energy exports to the world’s largest energy importer, which all else equal will advantage producers and midstream companies in Australia, Canada and the Middle East.

Also, the energy system in North America is closely integrated. Canadian heavy oil, for example, remains essential for US refiners to function. And the only alternative source is Venezuela, against which the Administration has imposed even more restrictions.

As the only game in town, Canadian heavy oil producers will likely not have to discount their product. And that means US refiners—who will actually be paying the tariff tax to Uncle Sam—will have no choice but to either eat the cost or pass it along to consumers and business.

My forecast is drivers will be bearing the cost of any tariffs at the pump this summer. That’s when demand is at its peak. And it’s also when major refiners like Valero Energy (NYSE: VLO) are forecasting the supply to tighten relative to demand.

The biggest potential danger of tariffs for energy companies is the possible impact on economic growth. Mainly, tariffs siphon funds that could be invested or spent, a drag on growth.

But tariffs or the threat of them is not the sole economic driver in 2025. Interest rates’ impact on investment, for example, is likely to be much more important. So tariffs would have to rise very steeply indeed to have enough effect to trigger a recession.

Ironically, the most compelling argument for energy resilience is right in front of our eyes: Even as oil prices have slipped into the high 60s, the price of natural gas has nearly tripled over the last 12 months.

Gas is strong for multiple reasons. But most encouraging is the fact that producers are still keeping their plans conservative and cost-focused. And where there is free cash flow, they’re still using it in the most shareholder friendly way: Cutting debt, buying back stock and paying dividends.

I look for more producers to start increasing the “variable” portion of their dividends later this year. But one thing we won’t see is companies throwing caution to the wind to ramp up output, unless prices are high enough and sustainable.

Memories of the energy bear market of the previous decade are still fresh. Management remembers well when even the strongest companies couldn’t raise capital on decent terms. And higher for longer interest rates are an ever-present reminder to cut debt.

That goes for midstream energy companies as much as for producers. The “build it and they will come” mentality of a decade ago is long gone. Now it’s pre-contract and lock in costs before turning the first spadeful of earth.

Geopolitical flare-ups in the Middle East could spike oil prices. Rapidly cooling import demand from China—either from a slowing economy or the government’s relentless push to boost the country’s energy independence—could send prices the other way.

But whatever happens this year, US energy companies are prepared for it in a way they definitely weren’t in the previous decade. And midstream companies with their capacity based, long-term contracts and ultra-conservative financing plans are doubly so. Buy the dips!

One suggestion for Dividends readers: Energy Transfer LP (NYSE: ET), a growing and broadly diversified master limited partnership—paying a just increased dividend of 7.5%.