Editor's note: In this episode of Industry Focus it is put forth that no oil & gas drilling has taken place on Federal Land in recent years. While it has been extremely limited (just 22% of U.S. oil & gas production comes from Federal Lands and the vast majority of this comes from offshore fields in places like the Gulf of Mexico, i.e. not via the process of fracking onshore), limited fracking of Federal Lands for the purpose of oil & gas extraction has occurred.
In this week's episode of Industry Focus: Energy, Sean O'Reilly and Taylor Muckerman let investors know what likely will (and what probably won't) change for the sector under a Trump administration. Find out why Donald Trump will probably not be able to deliver on his stance on coal, how this unexpected result might affect OPEC's pending production cut, a few issues with Trump's proposed plans for U.S.-centric gas and industrials, and more. Also, the hosts look into Total S.A.'s (NYSE:TOT) decision to invest in the Islamic Republic of Iran, and what it means for the company.
A full transcript follows the video.
This podcast was recorded on Nov. 10, 2016.
Sean O'Reilly: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is Thursday, Nov. 10, 2016, so we're talking about energy, materials, and industrials. I am Sean O'Reilly, and I am joined in studio by the one, the only, Mr. Taylor Muckerman. How are you, Taylor?
Taylor Muckerman: I'm all right, man, what's up?
O'Reilly: Well, I don't know. We have a new president-elect; the Cubs pulled out their win in possibly the greatest game in World Series history that I've ever seen.
Muckerman: I thought that we weren't going to have to talk about this now that Trump won. [laughs]
O'Reilly: News does overshadow the World Series, a little bit. But given the time we spent last week...
Muckerman: Yeah, fair. We'll touch on it.
O'Reilly: ...I felt the need to congratulate the Cubbies. If it had to be anybody, I'm glad it was you.
Muckerman: I will not echo those statements.
O'Reilly: Man, you're just all Cardinals, all day, every day. [laughs] Did you watch the game?
Muckerman: Yeah, I did.
O'Reilly: Did you enjoy it?
Muckerman: It was fun to watch.
Muckerman: Yeah, it was fun to watch.
O'Reilly: It had everything!
Muckerman: Yeah, and it rained away.
O'Reilly: That's what I mean! It had everything! Ties, errors, tarps, rain, extra innings...
Muckerman: The game started as a tie.
O'Reilly: ...all of it! I could not have made that up. Anyway, today we're talking about the energy and industrial sector under President-elect Donald Trump. But first, I wanted to touch very briefly on the news that French oil giant Total is now one of the first Western businesses and/or oil companies to invest in the Islamic Republic of Iran. Where is Crowe? We need Tyler Crowe when we're talking about Total.
Muckerman: We do, we need Tyler Crowe. Why is it a Western company? It's based in the Eastern hemisphere, isn't it?
O'Reilly: No, Europe and North America are considered the Western hemisphere.
Muckerman: OK. It is?
O'Reilly: You didn't pay attention in geography class?
Muckerman: Dude, Iran... eh, whatever.
O'Reilly: Geography. No, Europe is Western.
Muckerman: Yeah. OK. Got it.
O'Reilly: You're just giving me this look, like...
O'Reilly: So, I was actually very surprised. You would think -- in fact, all the articles I read, they were talking about how everybody thought they would wait to make a final decision on this deal until after the U.S. election, because Mr. Trump has not been super-keen on the lifted sanctions.
Muckerman: This is true; he's not the biggest fan.
O'Reilly: French oil company Total says they will avoid U.S. sanctions on Iran by using its own euro-denominated cash to finance the deal. Long story short, they have agreed to develop -- gosh, I'm actually surprised that it's this many phases -- the 11th phase of the giant offshore gas South Pars field over the next 20 years. Total is going to take a 50% stake, China National Petroleum Corp is taking 30%, and then the Iranian government is going to take the other 20%. Iran, of course, is doing this for the technology and expertise required to develop this puppy. Where is Crowe? We should have called him. I dropped the ball, here. What did you think about this, when you saw this?
Muckerman: It's pretty interesting. You knew it was going to happen sooner or later. Not only are they working with the Iranians, but also the Chinese.
O'Reilly: Everybody's in!
Muckerman: That's really going to anger Donald Trump. I think it's a pretty smart move. They have the ability to use non-dollar-denominated cash.
O'Reilly: It's also interesting that they're actually going to be paid for this investment in gas. They're not being sent money. That's interesting. [laughs]
Muckerman: That is interesting. I don't remember a deal where I've seen that.
O'Reilly: "I want you to pay me in natural gas." [laughs]
Muckerman: I guess they're betting on the fact that prices will stay -- well, at least in the near term, they might as well just take the gas and sell it on their own, or turn it into feedstock. Something, I don't know. But, tons of potential there, especially because a lot of these resources have been untapped for the last several years, so it's a market that they really didn't have to go out and discover anything. But I'm sure discussions took quite a while to arrive at this final destination.
O'Reilly: They said it was the 11th phase. That implies...
Muckerman: Yeah, the field has been producing. But now you bring in a global integrated company, a company that has been talking more and more about renewables, but now they're diving back headfirst into natural gas.
O'Reilly: There you go. All right, so, Donald J. Trump, president-elect of the United States. Huge surprise win. Very different energy policies, and thoughts on the energy/industrial sector between him and his opponent...
Muckerman: Yes, indeed.
O'Reilly: ...Secretary Hillary Clinton. First and foremost, I couldn't help but notice that a lot of oil and industrial stocks went up a bunch yesterday.
Muckerman: They did.
O'Reilly: Again, that was surprising because overnight futures in the stock market dropped. Very surprising 48 hours.
Muckerman: Yeah, at the limit, they were down 5% after-hours, and then opened slightly up. I just think, all the money sifted out, exchanged hands as it needed to before the market opened and uncertainty evaporated.
O'Reilly: I'm actually on his website right now, and we've been covering it on Fool.com a decent amount over the last few months. Broadly, what should investors in the energy and industrial space expect from a Trump presidency?
Muckerman: More oil, more gas, more coal. At least, that's what he's saying. Whether or not it actually happens, that's a different story. I could see more oil and more gas, but...
O'Reilly: The coal is trickier.
Muckerman: I'm still very dubious on any long-term future for coal. You can try to stimulate more production, but where's the demand?
O'Reilly: Even anecdotally, power producers in the United States have been shifting away from coal for years.
O'Reilly: And Donald Trump cannot change that.
Muckerman: Yeah, I would be highly skeptical of a utility that has shuttered a coal plant, in favor of natural gas, especially with natural gas being fairly cheap...
O'Reilly: It's incredibly cheap.
Muckerman: Yeah. So, I find it very difficult to believe that you're going to see the demand for coal, at least in the United States, run back up. China's already been forgoing it for over a year now, ahead of schedule to reduce their reliance on coal. Europe, very much reducing their imports of coal, as well. So, yeah, sure, stimulate supply. But companies in a capitalistic environment are not going to produce if there's no one buying it.
O'Reilly: Right. It seems like the rise of energy stocks yesterday, it was related more to having a friend in the White House.
Muckerman: Yeah, fair.
O'Reilly: Oil was down a little bit yesterday. In fact, it's down a little bit today.
Muckerman: Probably because people were thinking, "Oh crap, they're going to start producing a ton, they're going to free up federal lands for fracking, they're going to free up more offshore oil, they're going to reintroduce the Keystone National Pipeline, potentially."
O'Reilly: Oh, he said that?
Muckerman: Before he was elected, he did say, "If I am, I'm going to suggest that TransCanada [(NYSE:TRP)] reapply for the northern leg of the TransCanada Keystone XL pipeline." [Editor's note: A press highlights package, distributed before Trump's speech in Detroit on Aug. 8, included, "Ask TransCanada to renew its permit application for the Keystone pipeline."] The southern leg, from Cushing to the Gulf, is already there. But they're missing that leg to get Canadian oil sands oil to Cushing, which was the big hang-up with the Obama administration.
O'Reilly: Regarding the Obama administration, what do we know factually about...
Muckerman: Facts, do we really have to talk about facts?
O'Reilly: Just the facts, sir. What was that show? Dragnet?
Muckerman: I think so. Before my time.
O'Reilly: Bottom line, the oil industry, say what you want, did reasonably well under the Obama administration.
Muckerman: Yeah, if you look at it... if you look at the jobs that were created under him, if you strip out oil and gas jobs, you're left with net almost zero, if not negative jobs created. The oil and gas industry thrived, maybe not because of him...
O'Reilly: Probably more because of technological advances.
Muckerman: Right. There was a perfect storm for oil and gas in the United States to ramp up. So, I wouldn't give more than 50% credit to President Obama.
O'Reilly: So, how much restriction did he place on land usage?
Muckerman: You can't use federal land, for the most part. There [are] some ways you can apply right now, I believe. But I don't know all the ins and outs. But it was severely restricted. And there was no fracking on public federal land.
O'Reilly: It's on Donald Trump's website, here, it says, "open onshore and offshore leasing on federal lands, eliminate moratorium on coal leasing, and open shale energy deposits," which I assume we've been doing... anyway. He also says here, "Encourage the use of natural gas and other American energy resources that will both reduce emissions but also reduce the price of energy and increase our economic output."
Muckerman: That's basically a hedge of what he's saying. "I'll support this, but use whatever you want."
O'Reilly: Right. OK.
Muckerman: Which, again, companies are ramping up natural gas production. You're going to keep the prices subdued, competitive with coal, if not more advantageous.
O'Reilly: I wonder what OPEC is thinking now. They're supposed to make a deal in a month. And they, and most polls and pundits and literally everybody was like, "Hillary is probably going to win, so this, that, and the other thing."
Muckerman: What does that do for their decision-making?
Muckerman: It puts a little bit more pressure on them, I think.
O'Reilly: To make a deal? Or not make a deal? [laughs]
Muckerman: [laughs] I don't know. It's confusing because, if they do make a deal, prices could climb. But then, if prices climb, if we release some restrictions on...
O'Reilly: On our federal land.
Muckerman: ...our natural resources sector, yeah, then we can then capitalize on those higher prices and produce more. So, maybe they don't do anything, and they just keep churning out market share at lower prices to keep us at bay a little bit. As we've talked about over and over again, there's a huge drilling inventory in this country. With or without...
O'Reilly: 3,000 wells!
Muckerman: ...an energy-positive president in office, we have the ability to just turn it on. Like I said, I would imagine that prices at this level would be more advantageous for OPEC in the near term, until they can figure things out.
O'Reilly: The other thing I wanted to touch upon briefly was the industrial space. In tandem with the commodity cycle right now, as well as low oil prices, because you need a Caterpillar (NYSE:CAT) truck to get oil sands, we're all connected. One of our writers, Neha Chamaria, she wrote a fantastic piece the other day, "How a Donald Trump Presidency Could Affect Caterpillar Stock," but anecdotally, I do think this affects the entire industrial sector, with machinery, and...
Muckerman: Yeah, and not only just mining, but supporting infrastructure spending to a pretty large degree. That was one thing you saw...
O'Reilly: You want him to spend $1 trillion on infrastructure.
Muckerman: ...you saw Hillary and Donald both agree on during their campaigns -- the need for infrastructure spending in the United States, and not just earlier on in President Obama's first term, where he just said, "Let's go pave a bunch of roads." They're actually suggesting real infrastructure spending.
O'Reilly: Unsurprisingly, Caterpillar stock went up a bunch yesterday. It's up another 2.5% today. On the campaign trail, even as early as this year -- this is actually from a campaign speech in January, so it's even a bit older. It's been a theme. He said in January, Trump reflected on how a weak yen is hurting Caterpillar. "Friends of mine are ordering Komatsu tractors now because they've devalued the yen to such an extent that you can't buy a Caterpillar tractor, and we're letting them get away with it, and we can't let them get away with it." We can get in all kinds of debates about currency...
Muckerman: This is not an economics show.
O'Reilly: ...another time. But, bottom line, investors are interpreting this as, he wants to help manufacturing...
Muckerman: He wants to help manufacturing in the United States. I get it. But it's a global economy.
O'Reilly: We're all connected.
Muckerman: For now, at least. And then, hinting at the fact that, if he does end up getting the wall built, he'll only use Deere or Caterpillar equipment. Cool in theory, but then... OK. Petrobras. Major oil and gas company, integrated company, in Brazil, struggling for years because they have a mandate to use Brazilian employees, Brazilian equipment, and sell gasoline at subsidized prices, and they have to buy it on the open market at higher prices to sell it to them, because they're not producing enough to do that. So, yeah, I don't know. It just doesn't make any sense.
O'Reilly: Are you arguing against protectionism, Taylor? [laughs]
Muckerman: [laughs] Somewhat. I'm just giving an example of what it looks like, and how it's performed poorly by not allowing the use of the most competitive environment.
O'Reilly: The bottom line is, to your point, it's a double-edged sword, because in 2015, guess how much of Caterpillar's sales came from North America?
Muckerman: 20%?! 30%?!
O'Reilly: Little higher, 46%. But, bottom line, 54% of their sales came from abroad. And if we go protectionism, they, of course, won't make that.
Muckerman: Yeah, exactly.
O'Reilly: So, what do you want to do?
Muckerman: There's a whole lot at work, here.
O'Reilly: Lots of fun. Shoot, before we head out here, Continental Resources' CEO, Harold Hamm, he's Trump's friend.
Muckerman: Yeah, they were on stage together a couple times during the campaigns.
O'Reilly: Didn't they talk about him being at least an energy advisor or something?
Muckerman: I'm not sure.
O'Reilly: It's probably just talk, like, he wanted Icahn to be a Treasury secretary, and Carl Icahn was like, "No." [laughs]
Muckerman: I don't remember that about Harold Hamm. But, he has a company to run. So, we'll see how that plays out.
O'Reilly: So, before we head out, any interesting stocks you want to rap about in light of major political events as of late? Total, maybe? [laughs]
Muckerman: No, not Total. Though that is a pretty savvy play, the advantage of being an international company. But I do want to touch on the fact that Europe is in the Eastern Hemisphere, other than Spain and Portugal...
O'Reilly: Oh, you Googled this?
Muckerman: ...and a sliver of France.
O'Reilly: Hold on, really?
O'Reilly: I always thought... oh well.
Muckerman: It's both, but the majority is in the Eastern hemisphere.
O'Reilly: We're buddies.
O'Reilly: Hold on. You're talking about England and stuff? Hold on, we're going to...
Muckerman: Yeah, it basically cuts the U.K. right in half. Spain, Portugal are Western.
O'Reilly: Oh, see? This is my Anglo-Saxon-centric brain.
Muckerman: Yeah, see? Boom! But as far as a company I'm looking at, TransCanada. Sure. I mean, throw them a bone and see what happens.
O'Reilly: We're actually both right, here. I'm looking at this map, for all of our viewers, it has Ireland, U.K., half of France...
Muckerman: Not half.
O'Reilly: ...two-thirds of Spain, Portugal.
Muckerman: Yeah. That's it.
O'Reilly: Oh, come on.
Muckerman: Iceland and Greenland. Is that Europe? Yeah, that's Europe.
O'Reilly: Yeah. So, we're both right.
Muckerman: Depending on how big Greenland really is, maybe half of Europe is in the Western hemisphere.
O'Reilly: Well, Iceland is obviously the green one.
Muckerman: Well, yeah, but it's tiny. So, yeah, TransCanada. We'll see.
Muckerman: It's interesting, they fought for it for years, and now they might actually get hooked up.
O'Reilly: Do you think, as an economist, should this thing be done?
Muckerman: For open flow of oil and gas, mainly oil, sure. We import a lot of oil from Canada, basically all of the oil that they produce. I think, globally, and for us as an oil demand center, sure, I think it'll be an important way to get Canadian oil sands and oil to the open market. It'll probably be better for Canadian producers than for U.S. producers. But, I think overall, it will be necessary.
O'Reilly: Cool. All right, thanks for your thoughts, Mr. Muckerman.
Muckerman: Bad for the rails, I guess, if you see that completed.
O'Reilly: Bad for Buffett.
Muckerman: Even though that's been curbed the last year. Oil by rail, it would probably all but eliminate that.
O'Reilly: Because it's a little expensive.
Muckerman: It's a little expensive. And obviously we saw some crashes, so it's a little dangerous as well.
O'Reilly: Got it. Cool. All right, have a good one.
Muckerman: You, too.
O'Reilly: That's it for us, folks. We'd like to give a shout-out to our brilliant producer today, Mr. Dan Boyd. How's it going, Dan? If you're a loyal listener and have questions or comments, we would love to hear from you. Just email us at email@example.com. Once again, that's firstname.lastname@example.org.
As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against those stocks, so don't buy or sell anything based solely on what you hear on this program. For Taylor Muckerman, I am Sean O'Reilly. Thanks for listening, and Fool on!