Wealth & Finance International - March 2017

Wealth & Finance International 44 New Era for North American Energy any of us enjoy the freedom of being able to hop in our car and go anywhere or the comfort of returning to our warm home on a bitterly cold winter day. These modern-day con- veniences have become basic necessities that are provided by companies that are part of the energy sector. The energy sector not only serves basic needs but it is often the last puzzle piece connecting other sectors together like healthcare and technology. Not many sectors can point to a proven track record of steady increases in demand/consumption for decades. But as illustrated in the chart below the energy sector has demonstrated a long history of growth in consumption. In fact, in 32 of the last 33 years, global energy consumption has increased. Source: BP 2016 Statistical Review However, what many investors tend to focus on when looking to allocate capital to the energy sector is commodity prices. What a difference a year makes. Last year, we were experiencing a crude oil Armageddon with oil prices in the midst of the longest period of declining prices in history. Over a gruelling period of 568 days, prices declined by approximately 75% from $107.62 on July 23, 2014 bottoming at $26.21 on Feb. 11, 2016. Today, the global oil markets are rebalancing and inventories are begin- ning to decline partially due to declines in U.S. crude oil production and an agreement from the Organization of Petroleum Exporting Countries (OPEC) to reduce production. In addition, there has been a significant demand response to low oil prices with global demand growth exceed- ing historical averages by 70% on average in the last two years. Oil prices have stabilised around $50 per barrel and the broad energy sector was the best performing sector in the S&P 500 in 2016 with the S&P Energy Select Sector® Index returning 28.2% for the year, a rever- sal from 2015’s double digit negative return of -21.5%. At Tortoise, we believe that the table is set for the energy sector to deliv- er solid returns across the energy sector as we’re witnessing a new era for the North American energy sector. Midstream fundamentals have also improved despite project delays. And finally, with greater exporta- tion of energy commodities and a more energy-friendly U.S. President Donald Trump we’re witnessing a new era for the North American energy sector. What to Watch for in 2017 Return of U.S. Oil Production Growth After falling in 2016, U.S. oil production is expected to increase in 2017. U.S. oil producers are adapting to the current low oil price envi- ronment. Using technology and innovation, several U.S. oil producers can produce oil at a cheaper cost than many OPEC nations. OPEC’s Production Cut Compliance and Potential Extension Compliance with the OPEC agreement to cut production appears to be going very well with the committee reporting that more than 80% of the original 1.2 million barrels per day of supply reductions have already taken place as of mid-February. The original OPEC agreement had a term of six months. OPEC member countries will be discussing an extension of the agreement in May 2017. We believe that oil prices will likely remain range-bound between $50 and $60 per barrel in 2017, but we think this is a real sweet spot for U.S. producers in the major shale basins that can earn adequate rates of return at these prices, but just as important, global consumer demand has remained high as well. Natural Gas and Renewables Gain Market Share We think oil is not the only way to make money in the energy sector. In fact, natural gas and renewables are gaining market share while coal is losing market share in the global energy consumption pie. While re- search and development continues in the renewables sector, we believe that natural gas is the bridge fuel that effectively reduces emissions like carbon dioxide. Natural gas is clean, cheap, and abundant. Acceleration of energy infrastructure A new administration ‘Trump’ets in change. In our view, the new Trump administration will be supportive of the energy sector and specifical- ly the energy infrastructure sector. We expect a reduced regulatory permitting process for pipeline infrastructure, and support for the revival of the Keystone XL pipeline project which was evidenced with Trump’s Rob Thummel, Tortoise Capital Advisors’ managing director and portfolio manager discusses the dramatic disruption affecting the global energy balance with the evolving North American energy story. M 1703WF06