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Feb 10, 2021
29:12 MINS
EnergyCents- Ep 25: Trading places II: Energy comes back
Michael Schpero
Director and Energy Team Lead
Brian Manalastas
Institutional investors are showing renewed interest in energy-sector equities in 2021 across both traditional and low-carbon themes. S&P Global Research Directors Michael Schpero and Brian Manalastas return to EnergyCents to discuss the trend in more detail, and share expectations for the future.
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- EnergyCents - Ep 25 - Trading places II - Energy comes back - Transcript
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Voiceover:
This episode of EnergyCents is brought to you by S&P Global Financial and Capital Markit Energy Advisory Group. Our team of experts provides the investment community with actionable insight and integrated thought leadership that identify the trends and trend makers of global energy markets. Solutions cover the full energy and natural resources sector from traditional fossil fuels to emerging clean tech ideas and supply chains. And are available via recurring reports webinars, robust data sets and personal engagements with experts.Hill Vaden:
All right. Welcome back to EnergyCents and S&P Global podcast devoted to topics that lie on the intersection of energy and finance. This is Hill Vaden and I'm here as always with Breanne Dougherty. Breanne, how are you?Breanne Dougherty:
I'm great. I looked at the calendar today. Much to my surprise, January is over.Hill Vaden:
Basically.Breanne Dougherty:
Yeah, I don't know how that happened.Hill Vaden:
And it’s Thursday, not only is January over but this week is over.Breanne Dougherty:
Yeah, the week's over. And I've got to tell you, what day are we at, the 27th? 27 days into 2021. And over the 28th, there you go case in point and I'm already behind. I don't know what to tell you. You go into the New Year saying what, this year. I'll stay in front of everything, I'll get in front of everything. And then within 28 days, nope 100% falling behind already.Hill Vaden:
Maybe a little bit of time left to catch up.Breanne Dougherty:
To try to catch, I’ll catch up on Saturday. Maybe that's what I'll do, that rush.Hill Vaden:
There you go. Well, so today is a bit of a sequel episode. We've got Brian Manalastas and Mike Shapiro back from last year's episode which was somewhere around I think around March or something last year where we titled it trading places and talked about the influx of retail investors in the energy space. Brian, Mike, how are you all?Mike Shapiro:
Doing well thanks. Glad to be back.Brian Manalastas:
Yeah, thanks for having us.Hill Vaden:
Yeah, glad to have you back. Well, I guess before we kind of get into to more of the energy topic given that it's a sequel. And given that the title of the last episode was trading places which I don't think they've done a sequel of trading places, yet have they?Breanne Dougherty:
I don’t think so. I feel like the story has been adapted in several different ways like the trading places concept. But I don't think it's actually.Hill Vaden:
I mean Hollywood seems to be completely out of ideas. So, it wouldn't shock me if they do a trading places sequel at some point soon. Especially with all this this week's kind of focus on called new investors moving against established investors in the way that happened with orange juice futures and trading places. But as were thinking about trading places or sequels, the new sequel that is supposed to come out that this spring is Coming To America another Eddie Murphy film. Or any of you looking forward to it? I assume we've all seen Coming To America.Mike Shapiro:
Many times, that's my sweet spot age wise, so don’t worry.Brian Manalastas:
Yeah, looking forward to it. You know watch the trailer I don't know how it can be bad although you wonder how good it could possibly be. But I'll still be watching, just to see the barbershop stuff again. I'm in.Breanne Dougherty:
I'm with you. It's one of my favorite movies. So, I'm really excited to see it. I re-watch it quite a bit actually. Maybe it's because it always shows up in random streaming services but I'm a little worried that it's going to disappoint me. But I feel like even if it does disappoint me, it's not going to take away my love for the first one, right? It's not going to sour the movie.Hill Vaden:
Maybe it’ll surprised to the upside like Cobra Kai, maybe the sequels are on the upswing. I think I mean Eddie Murphy has been at probably more careful with his legacy than anybody but maybe Rick Moranis. Rick Moranis just went after Honey I shrunk The Kids like three or something, I don't know what sequel was but he said I'm out, right? Eddie Murphy after Shrek or something got out of the game like. Well, that don't mess with Coming To America. I mean how could one improve that.Mike Shapiro:
That's a good point if he's willing to come back, it's got to be good.Breanne Dougherty:
Well, let's be honest I'm pretty sure the paycheck is good. I mean he hosted SNL was it was recently last year. It was pretty recent and we can’t stand it. I mean he is outstanding. And I don't think that I fully recognized how outstanding he was until you're used to watching other hosts maybe. And I feel like he blew it away. And I don't think I'm particularly biased like I've loved his work but it's not like I’m some sort of Eddie Murphy fan, diehard fan or anything. But I thought that he was on point and he did an excellent job. And so, I think that he's figured out how to keep things relevant. So, I've got high hopes for this refreshed version.Hill Vaden:
Brian?Brian Manalastas:
Yeah, I mean he's like the OG standup artist.Mike Shapiro:
Yeah, Richard Pryor may disagree.Brian Manalastas:
You can't really go wrong with Eddie Murphy so definitely looking forward to it.Hill Vaden:
I am concerned on just expectation management. I have a tuna rule, I won't watch movies when I read the book because I always think the book is better than the movie. And I'm just not sure, I mean that scene with sexual chocolate. I can’t remember the name of the song right now but it is so good that I don't see how you can come back from that with sequel.Mike Shapiro:
I could have sworn I saw sexual chocolate in the trailer. So, I think they're coming back.Hill Vaden:
Well, I guess now are moved to come back from last year's trading places and hopefully release a better episode on a discussion here of, I guess, energy investment. Whether that be retail or institutional investors. And Mike maybe a good place to start is just update us over the past, call it year that we've been watching this energy has been in the doghouse not others. Some green shoots, I guess, for both traditional energy and emerging energy. Can you kind of put that in perspective before we go into the weeds?Mike Shapiro:
Yeah, definitely I consult most of the last year pretty quickly. Nothing happened like there was no investors. Our clients received no inbound calls. There was really nothing going on. There was no interest in energy. The oil prices were declining. We’re skepticism over, the skepticism remain about in peace ability to remain disciplined. Long term demand, short term demand with the COVID crisis and everything else. There really was nothing going on.And then heading into the election, investors remain garishly position towards energy. And there was concerns about Democratic White House and what that meant out on lands and just a lot of rising rates. A lot of concerns remain and kind of all at the same time when there was some positive vaccine news. And a rollout was coming oil prices started to find its footing and started moving higher. And things started turning up for the energy stocks. They started doing a lot better. We even saw how pop up in the rig count and off we went. And from about, I guess, early November through even just recently even this week energy stocks have just gone way higher.
We're looking at the S&P Energy 1500 index and they're all up 60, 70, 80%. There's been tons of buying at the fun level very little selling maybe some deep value investors have moved out. But mostly we're seeing investors coming in and it's been a pretty amazing rise of late. And our clients are getting calls, tons of calls. They're on virtual conferences, lots of inbounds, lot of investor interest. So, things have really turned around here.
Breanne Dougherty:
For the big guys and small guys alike?Mike Shapiro:
Well, the recovery started more with the higher quality bigger names. And as the oil prices continued to recover, we started seeing some rotations out of some of the winners into some of the laggards. And some of them of the higher betas EMPs were starting to benefit as well. And some of the larger value yield investors were rotating some of the ones that have run and looking for better value at trees with some laggards as well. So, it was kind of self-fulfilling prophecy. And the entire space just moved higher.Hill Vaden:
In terms of momentum, Brian, or are we still seeing people move into this if everybody's moving higher as the pace of movement changing it all?Brian Manalastas:
Yeah, that's a really good question. We really saw on a net basis that institutional money where again to Mike's point indiscriminately buying almost all oil and gas sub sectors really at the beginning of November and then it kind of strengthen into December to year end. And now what we're seeing is it's kind of peering out a little bit into January. So, we're definitely seeing a bit of a pause from a capital flow perspective from our institutional guys. So, interestingly retail on the flip side when we saw them buying pretty aggressively over the summer, they have actually been sellers here into the strength. And so, they're dumb money so to speak as selling into smart money here which is kind of interesting. So, I think we'll have to see what flows we’ll dictate. But so far, the momentum is still pretty much there. Just tapering back a bit.Hill Vaden:
I mean is there a slight repositioning going on or maybe slights not the word. But if the “smart money” is getting into energy getting out of if we looked into that.Brian Manalastas:
Yeah, so the other hotspot we're seeing definitely is the renewable space. So, the old energy space so to speak, I mean we're definitely seeing dollars kind of flow into that space pretty strongly. I think we were chatting before this. Take a look at that the Invesco Solar ETF, that's 12-year chart or 12-month charts. So, it’s because it's up over 200%. \So, we're definitely seeing some money flow into there. And really where the money is coming from is this tech. The flow perspective that's definitely where we're seeing some app flows.Hill Vaden:
And moving into energy. And what, I mean aside from some of the obvious, what was driving the renewed interest in energy across all sectors. I guess it's both traditional energy, sounds like it’s both traditional and emerging energy that's beneficiary. Is it all ESG? Is it all oil price?Mike Shapiro:
To be a combination but the oil price is definitely front and center here. We've had lots of conversations over the years with by side professionals. And the first thing they mentioned is oil price stability in every single conversation. And they now have that. And in generally speaking, people are feeling pretty good that we may not move a lot higher from here. But there's a pretty good flow in oil and it's giving them a lot of confidence to put money to work. As we mentioned higher beta names they're attracting capital rotations are going on. So, there's definitely activity. And as Brian mentioned it's tapered a little bit. But the stocks have run over 100% in a lot of instances. So, it's probably unnatural times a slight pause.Brian Manalastas:
Yeah, overwhelmingly though it does seem like there's a preference for mid to large cap EMPs and your typical IOC right. So not so much a small cap names although we have been seeing pockets of influence there as well.Breanne Dougherty:
Do you think that the longer there's stability in oil price that we'll see the inflows in those smaller guys creep up?Brian Manalastas:
That's right. I think we definitely are seeing that. I mean investors are moving out of the risk curve here. So, definitely seeing some inflows here on the institutional side into your mid cap, higher beta names.Hill Vaden:
And you mentioned, Brian, the retail institutional difference is there what sounds like so the institutional investors are all of a sudden becoming more interested in traditional energy at a time when the retail is losing interest in traditional or?Brian Manalastas:
That's right. It's almost like they've made their dollars and they've moved on. I mean, we're seeing outflows across all your typical pure play retail accounts, your Robin Hood custodians, Schwab TD, e-trade, all your top retail custodians have been observing weekly outflows really since the end of September. And that's really intensified into December while inversely institutional dollars have been flowing in. And it almost seems like the retail crowds kind of moved on to your game stops in the world, your highly shorted names. It's quite interesting how really, there it seems like they're quite a sophisticated bunch.Mike Shapiro:
It's so fascinating because back when Coming To America came out the perception of the first one. Retail investors were always perceived as being kind of dumb money. They were the bag holders. They were nervous to buy and they finally go in and just completely enter the top. And group is very different and we're seeing large deep value investors moving out after making a good amount of money as well as retail, deep value and retail moving out and handing the shares over to value more growth momentum type of investors. So, it's got very different look than it used to be.Breanne Dougherty:
And we think that they'll stay up.Mike Shapiro:
We do. We think they've moved on. It’s pretty amazing. It's very different.Hill Vaden:
So, what do we expect to see kind of going forward on both sides of this? I guess maybe let's start with the traditional energy space and talk a little bit more about the emerging kind of clean tech space which seems to have all of the enthusiasm of kind of scalable software companies.Mike Shapiro:
What we're hearing and what has never left the conversation is EMP’s ability to remain disciplined. Are they going to start dumping the money back into the ground? Are they going to wait for 60 $65 oil investors have never thought being concerned about bad historic behavior even though for the most part EMP have demonstrated capital discipline from many quarters at this point? But there's also big concerns about longer term demand away. Given energy transition, there's some large macro factors here that may be significant headwinds still out there. And we may have just seen the best energy has for a while, I hope not. But it's possible that it might move sideways for quite some time.Hill Vaden:
Is there a difference I guess, Brian, before we get into that. Mike, is there a difference in some of the gas versus oil exposed names or…?Mike Shapiro:
Yeah, the date that the Brian and I reviewed showed net inflows of institutional capital towards oil your names as oil prices moved up. Net gas has remained pretty low and flat. And that we haven't seen a material pick up on that front is after, Brian.Brian Manalastas:
That is there, yeah. And I think what's particularly interesting since you touched on this hill is this rotation into renewables into the Ault energy sector is very real. I mean it's all this buzz on ESG. Initially our clients felt that it was more of a talking point. Kind of like a checklist of something you needed to do to clear a hurdle with the buy side. But what we're noticing is it's this the tension, it's really picking up from the investment community. It's sticking. And so, we're noticing that a lot of teams are dedicating more man hours, more resources to this ESG concept. And I mean just take a look at what the renewable spaces doing right that the absolute change in total dollars invested at least from what we're able to see from the issuers. We have visibility and two, is pretty significant. So, we think that's here to stay. And that's real competition for traditional on gas.Breanne Dougherty:
And other parts across the value chain of the renewables that you think that this has been focused specifically or do we have that granularity that we can sort of break that?Brian Manalastas:
Yeah, so far, we're able to see I mean that's a side of the business we're trying to build out here to be to be frank. But we're seeing mostly in clean energy utilities and solar so far.Hill Vaden:
I mean talk a little bit more about utilities. Is that kind of caught somewhere in the middle between traditional energy and clean tech?Mike Shapiro:
It is. But some of the names that we have there, the investors are very excited with renewable side of it. And that's really where the focus is. It's very interestingly, we work with a NIRO excuse me investor relations officer on the renewable side has exposed the renewable side. And he's starting to see some of the old energy investors again. Some people he hasn't seen for years and years are showing up to talk about the renewables now that there this exciting growth opportunity. And traditional energy has really become more of a yield play. It's more like it's in the seventh inning whereas the renewables are in the second inning. And so, it's just he's like oh so this is where you went to. This is where you've been, I used to call me all the time about oil and gas. So, it's kind of funny in a way.Hill Vaden:
Are you seeing any differences in the profiles of investors between the clean energy and traditional in terms of value versus growth? Or is it fairly even across both sectors if you think and looked at in that way?Mike Shapiro:
Yeah, there's definitely growth investors moving towards renewable and we're seeing mostly value and yield names on the traditional energy side.Brian Manalastas:
Yeah Hill, that's an interesting question. I think we're seeing a lot of energy dedicated funds split their attention so to speak between traditional and Ault Energy. And a lot of these hedge funds have been spending a lot more time in a clean tech areas. You could imagine especially with energy kind of in 2020 not doing so well or traditional oil and gas so to speak. So, I think we're seeing more of that. And you see this capital markets realigning themselves to that as well right to sell side. And a lot of these middle market banks and analysts are increasing their coverage universe to cover clean tech. So, it's a bit of a land grab right now.Mike Shapiro:
That's a great point, Brian. There are older specialist traditional energy focused hedge funds. They're starting up new funds and almost closing the old funds or shifting a lot of the resources towards new funds focused on renewables. Definitely changing their approach.Breanne Dougherty:
Is there a risk that this acceleration in that sort of investment towards the renewable space is going to get too hot too fast and then in essence create a bubble? Is that something that could be on the horizon? Or do we think that it's pretty n for the long-haul type investment?Mike Shapiro:
I mean I think both. I think it maybe it's over. It could be overheated at this point. And it's not that easy to switch over to solar, it's expensive. Those types of headwinds are still there on a personal the homeowner and what not. But longer term, they're mandating switches over EVs and this doesn't seem like it's going to reverse anytime soon. So, it seems longer term that all traditional oil and gas is still going to be under a lot of pressure.Hill Vaden:
So, what I mean if we're looking at this, you know, with the benefit of hindsight. Are there any kind of surprises that we've seen and change the way that we're looking at the space from that kind of institutional investor standpoint? Or I mean the idea like that oil prices were driving this in a sense kind of re-confirms much of what we've known. That no matter how different things are, things are still the same.Mike Shapiro:
Yes. I unfortunately agree that without a strong oil price, we're going to lose a lot of the interest.Hill Vaden:
And the stability I guess, did the perceived stability of the oil price just it kind of keeps us in a sweet spot for a little while.Mike Shapiro:
It does. You know they're the discipline that's been enforced here basically mandated by the street has been implemented. So, it kind of creates a range where there'll be more activity in the 60a. There'll be less activities in the 49s. Global demand long term demands going to slow. But the supply is controlled by that range on the US front. Internationally it's hard to imagine OPEC doing anything unusual again given the world's moving becoming a little less dependent on oil than it was. So, it seems like all these macro factors are pushing this into a bit of a range longer term.Breanne Dougherty:
I think you raise an interesting point though because I guess it reinforces the idea of the importance that investors are playing now in potentially producer behavior particularly within the US on shore, right? That they're going to be disproportionally penalized if they start growing too fast because the investors will start pulling out. And I think maybe the behavior that you've just described really actually does reinforce that thesis that everybody really thinks it. But your data is actually really starting to show it now. So, what I'm hearing from you and please tell me I'm wrong here. If oil prices start going down which would probably be because oil production ramped up, right? Then we would see retrenchment again in the investors pretty quickly.Mike Shapiro:
Yes, yes. It seems like it's kind of a loop almost where the investors are going to lose confidence as oil moves lower towards 40. And as it moves back up, they will have a little more confidence. Yeah, it seems like where the whole space is sort of locked into a range for the time being.Brian Manalastas:
If real, I'll jump in here real quick. You have real time capital flows as an indicator of what's to come in the near future. I think what's interesting is we're seeing institutional capital become a lot more sensitive than historically in the past. And remember like the entire shareholder composition for your average GNP or even just across the spectrum has changed significantly right. Retail ownership has increased over time. Meanwhile that has been on a downward trend. I mean it's still relatively high you know compared to where it was a couple years ago. So, because of that ratio has changed. I think what we're really seeing is to Mike's point earlier that there is a lot more sensitivity here. I mean the momentum can shift literally in a day. And that's something where we haven't really seen in the past because you typically what we'll see steady consistent inflows across your typical long only custodian. And that's rarely the case these days, so.Mike Shapiro:
Yeah, to Brian’s point. We saw a lot of the generalists leave the space for years as energy went from 15% of the S&P 500 to 2%. And this bounce back is only taking it up to 2.5%. So, we really haven't returned to the glory days of this. And we have not really seen a meaningful uptick in generalist investor return. It's more increase in interest from the ones who are still active in the space as opposed to bring back investors that have left the space. Those investors have not returned as I just told you, they've been calling our friend who is an IRO who works on the renewable side somewhat. So, they're still over there, they haven't come back to traditional oil and gas.Hill Vaden:
I think one of the interesting things you were talking about discipline and when some of these oil and gas names were once darlings. It was all about the growth and all about the first mover advantage a lot of these companies said. We got to get into these plays, we got to get in big, we got to get the biggest acreage. It's not far removed from what we're talking about with renewables right now. The scale is such an advantage for both types of companies and the scale possible with things like solar from the absolutely a few weeks ago. I wonder if the next time we speak or sometime in the future whether five 10 years whatever it is, it's the renewable companies where discipline becomes the guard, it's this need for scale at all costs. At some point, the investors are going to rein you in. So, there might be a blueprint here for some of these emerging energy companies to look at the traditional energy companies.Mike Shapiro:
Yeah, interesting to see how that unfolds.Hill Vaden:
Well, I guess that's a decent place for us to leave this as a set up for a future sequel. Maybe we could do this like the little Rocky series which I think is in like Rocky what? You're now Apollo. Apollo II was effectively Rocky 4 -- 2 but a weird sequel to have called it that. So maybe we can come back with a trading places seven or something. Jason, I guess what was in multi is that probably the longest running sequel series for 13.Mike Shapiro:
Not that I've watched them but Fast and the Furious has become a pretty big deal. They thought about a hundred of those, right?Hill Vaden:
All right. Well, something for us to aspire to. And so, Brian, Mike thanks both of you for your time bringing us that having some technical difficulties. So, if you want to say goodbye wave and otherwise, we will pick this up next time.Breanne Dougherty:
I'll give away. That sounds okay. Well, I guess this is it. Is that obviously the powers that we knew I had nothing valuable to stay here today. That’s the fine Mike until the closing of the show. Well thank you very much everyone.Hill Vaden:
Thanks guys.Brian Manalastas:
Thanks guys.Mike Shapiro:
Thanks guys.Voiceover:
To read additional insights from our team of experts, visit our blog at www.ihsmarkit.com/energyblock. You can also find our experts on social media by searching for S&P Global Energy on either Twitter or LinkedIn. Have a topic idea or want to send us feedback, email our podcast team at energycents@ihsmarkit.com.Voiceover:
This podcast contains information and insights copyrighted by S&P Global. To learn more about S&P Global Energy Solutions, visit ihsmarkit.com/energy. That's I-H-S-M-A-R-K-I-T dot com, forward slash, energy.
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