President Trump has been pushing a new law that would mandate midstream pipeline companies to use only American steel in their pipes, and big pipeline players like Kinder Morgan and Energy Transfer Partners are lodging their complaints.

In this episode of Industry Focus: Energy, Motley Fool analysts Sean O'Reilly and Taylor Muckerman explain why. Also, the hosts look at how U.S. oil production has recovered to nearly 2014 highs while rig counts have not gotten close, when Canadian oil sands giant Suncor Energy (NYSE:SU) might buy into some of the oil-sands sell offs we've been seeing lately, one interesting way energy investors can get exposure to the medical-marijuana industry without taking on too much risk, and more.

A full transcript follows the video.

This video was recorded on May 4, 2017.

Sean O'Reilly: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is Thursday, May 4, 2017. May the fourth be with you. We're talking about energy, materials, and industrials. I'm your host, Sean O'Reilly, and to my left is Motley Fool Premium analyst and occasional visitor to Canada Mr. Taylor Muckerman. What's happening, man?

Taylor Muckerman:
I think you say "may the fourth be with you" a little too quickly. You just brushed right over that. Easy, Chewbacca! Oh, no, that's Yoda.

O'Reilly:
Dude, it's OK. Are you a Star Trek guy?

Muckerman:
No, a Star Wars.

O'Reilly:
I can't even ... Austin, can I leave? No? I can't leave? Fine. Today, we're talking about the truly global industry of manufacturing U.S. oil and gas pipelines. We promise we will make it funny. Hints by Suncor Energy regarding the future of the Canadian oil sands.

Muckerman:
That's in response to your question from a few weeks ago.

O'Reilly:
Thank you! Yeah, you found that for me.

Muckerman:
Yeah, we talked about all the U.S. producers selling their oil-sands assets, and you were like, "I wonder if Suncor is interested in any of these," and it turns out they might be.

O'Reilly:
It turns out my intuitions were correct. This is something we really talk about, but this will be fun, which is the fertilizer industry. And be sure to stick around for the end of the episode, where we'll be revealing today's Industry Focus Puzzle Week clue. But first, Taylor, really quick, it's what we do, oil prices are falling today, again, and we have to talk about it. These are some crazy numbers. I read these and I'm like ... darn it, Taylor is right ... oil continues to fall as U.S. production surges. Oil has fallen today as it was reported that U.S. crude output rose to 9.29 million barrels per day on average last month, the highest level since August 2015, according to the Energy Information Administration, which is the federal government agency, this is not the French EIA, or whatever. OPEC is likely to extend the 1.2 million-barrel-a-day cut agreed to in November for six months according to a Nigerian oil minister, Emmanuel Kachikwu -- I'm totally destroying the pronunciation, I apologize. For some context, we topped out at 9.6 million barrels per day, give or take, back in 2014.

Muckerman:
Sounds about right.

O'Reilly:
So we're only 300,000 barrels a day off of that. We sprung back pretty quickly there.

Muckerman:
Every major basin in the U.S. is producing on an up slope right now. The Permian never stopped growing, even during the downturn.

O'Reilly:
So offshore is really the only thing that's down, then?

Muckerman:
I don't have the exact numbers, but yeah, I would have to imagine. You don't hear about much production offshore these days.

O'Reilly:
We bottomed out at ... was it 8.4 million barrels?

Muckerman:
Yeah, it was in the mid-eights. You see the rig count is back to where it was in early 2015. 

O'Reilly:
So it's not back to the 2014 highs, as production isn't ... but still.

Muckerman:
 The rig count? No, but to show that the rig count was not even close to where it was at the peak, and we're still only 300,000 barrels off per day of production ...

O'Reilly:
We're good at being wildcatters. Yee-haw!

Muckerman:
[laughs] Yeah, we're very good at being wildcatters. I can't remember which CEO, it might have been Chevron's CEO, he still won't say that shale -- and he's right -- shale won't be the savior forever. But it's certainly the savior in terms of oil production right now.

O'Reilly:
Do you ever see those reports that the shale is fun and everything, but there's only so much we can do with current technology, and we'll make it a little bit better, but really it's only going to last another five years?

Muckerman:
I don't know if I've seen an end date.

O'Reilly:
We'll have to do that on another show, it's totally cool. But I've seen these things, like, "This is awesome and great and fine, but it's not billions upon billions of barrels."

Muckerman:
That's what we thought decades ago, too. And then we figured it out. And we're still leaving a bunch of oil in the ground in these unconventional wells, sometimes upwards of 60% or 70% is still left in the ground. So we can figure out how to tap into it. There's incentive to figure out how to do it. There's a lot of headway there.

O'Reilly:
And once we do figure that out, we're going to need pipelines, which brings us to our next segment.

Muckerman:
We already need pipelines, according to, last week, with the Permian overflowing in the pipelines.

O'Reilly:
Yeah. On that note, President Donald Trump --

Muckerman:
He's making America great again.

O'Reilly:
He is, and he's trying to get our midstream oil pipeline operators to use American steel for all the pipelines. The industry, which includes companies like Energy Transfer Partners and Kinder Morgan, have a few things to say about that and have sent letters to the Executive Branch, noting how it's not so simple. I'm sure you have a few thoughts here, but I just wanted to give a little bit more context. On average, according to the letters, U.S. pipelines are made with about 30% domestic steel, and the rest comes from abroad. This isn't necessarily U.S. pipeline companies' faults. No U.S. companies, for example, make valves that meet the requirements set by the API, which is the American Petroleum Institute. So they have to go abroad. It's not an option. What's a pipeline company to do? Send him an angry letter?

Muckerman:
Exactly what they are doing, trying to get him to delay the rules or outright do away with them. We're already, as you said, in some of these basins short on pipelines, and if these requirements are instated by the U.S. commerce department, they're not going to be able to build them, either efficiently or cost-effectively. So the start dates for these pipelines are going to be pushed out or just cancelled altogether. You see this for oil and natural gas pipelines. It's not just oil pipelines; it's any pipeline. They're trying to mandate all American-sourced products.

O'Reilly:
Being the good old American patriotic boy that I am, I do wonder why U.S. steel companies and component manufacturers don't make these things. Is there a patent over in France? Do you know what I mean? Couldn't they conceivably do it?

Muckerman:
They probably could, I don't know. But then again, it all boils down to profitability. Can they do it and make a profit off it? That might be why they're not doing it in the first place. Capitalism at its finest right here; they're not going to make something if they can't --

O'Reilly:
Oh, this is the econ class, the comparative advantages. Company A is good at making wheat, and Company B is really good at making pipeline valves. We're going to trade our wheat and our valves.

Muckerman:
Basically, yeah. It's a shocker when you can send valves over on a massive cargo ship from a different country and produce them cheaper, therefore you can sell them cheaper, therefore pipeline companies can buy them more cheaply.

O'Reilly:
And make more money.

Muckerman:
Or at least break even. There's a lot going into all this that I don't think was originally considered. 

O'Reilly: It sounds nice on its face.

Muckerman: Yeah. Without getting political, this is a trend, where there's overarching promises where the nitty-gritty isn't exactly realized or talked about until it's time to enforce it, and then companies are like, "You guys are way off base here; this is not possible." And if you enforce this, it's going to hamper U.S. energy production and distribution.

O'Reilly:
Right. Which is, as we saw last week with the Permian, we just need to get these things built, now. 

Muckerman:
Yeah, exactly.

O'Reilly:
Popping back up north here to Canadian oil sands, Suncor Energy, which is known for being a Canadian oil-sands producer, and Warren Buffett actually used to own shares in the company, I don't think he does anymore.

Muckerman:
Yeah, they're not just a producer, they're the [ExxonMobil] of Canada.

O'Reilly:
Yeah. They're looking at deals, basically looking to pick up a few assets in the Canadian oil sands that are basically being sold by other international energy companies that are not domestic in Canada. They noted the deals; it seems like there won't be numerous, because Suncor is known for having high expected internal return hurdles.

Muckerman:
Which, as a shareholder, you could appreciate.

O'Reilly:
For sure. So why aren't more oil companies like that?

Muckerman:
That's a good question. I think that's a philosophical question.

O'Reilly:
I'm going to go get my pipe.

Muckerman:
[laughs] No, there's a shortage of those. It'd better be an American-made corncob pipe.

O'Reilly:
[laughs] Wrong pipe, dang it!

Muckerman:
So, you figure, you've seen Royal Dutch ShellConoco Phillips, and Marathon Oil all sell, if not all, then a majority of their Canadian oil-sands exposure this year already. Suncor hasn't been involved in that. They did buy some oil-sands exposure, more oil-sands exposure, last year. But they're hearing rumblings of other companies wanting to sell out of the oil sands. If the price is right, like you said, they're not going to change their ways in order to purchase, which may be why they didn't get in on the previous three deals that have been announced this year. But if oil prices continue to slide, a better opportunity could present itself.

O'Reilly:
They would be the natural buyer. These assets, if they're anywhere close to current assets, they've already got the trucks and the pipes ...

Muckerman:
Yeah, the infrastructure is in place, and the ability and the knowledge and the manpower and all of that.

O'Reilly:
I can't believe what a good job Suncor has been doing over the last few years. In fiscal year 2016, they just barely lost some money on a free cash flow basis, and over the last trailing 12 months thanks to this first quarter, they generated free cash flow of $600 million in Canadian dollars. It's basically one to one right now. But, anyway, that's pretty cool, to be doing that in oil sands. This is, like, the tar that you're putting in trucks, this is not easy.

Muckerman:
Right. This just goes to show why they've been reportedly the best oil-sands producer for at least the last five to 10 years. When you've seen the deals that have been made, the company made a good point that now that Cenovus and Canadian Natural Resources have gone out there and purchased assets. They might not have the balance sheet purchase more, so if other companies come out and want to try to sell --

O'Reilly:
Literally to clap out.

Muckerman:
Yeah, there's going to be fewer buyers, therefore reducing the selling price, most likely, allowing Suncor with the balance sheet to come in and potentially scoop these things up.

O'Reilly:
For sure. On to fertilizer. Everybody's favorite fertilizer company, Scotts Miracle-Gro (NYSE:SMG). It's not direct, but they're getting in on the marijuana business, Taylor? A little bit?

Muckerman:
Apparently, we're not allowed to talk about the marijuana business, because that's for healthcare.

O'Reilly:
We have a solution here. Are you ready?

Muckerman:
We'll talk about fertilizer, not medical cannabis. So, yeah, for the last couple years, there's been rumblings of this company wanting to access the marijuana market, and as states continue to --

O'Reilly:
It's legal here in D.C.

Muckerman:
 To legalize it. Yeah, you can grow plants in your house if you live in Washington, D.C., and several other states. Scott's Miracle-Gro is a company that the common men and women can access at the hardware store, and they've been ramping up spending on the hydroponics side of their business.

O'Reilly:
This is a big number. Did you see this?

Muckerman:
They're seeing great results, yeah.

O'Reilly:
They have a subsidiary called Hawthorne, and one of the most popular ways to grow cannabis is with hydroponics, which is the method of growing plants without soil using mineral nutrient solutions and water solvent. I actually pictured the little packets they give you when you buy flowers for your wife.

Muckerman:
Yeah, there's just a tray where the roots descend into the water, and the plant remains above board.

O'Reilly:
Yeah. This subsidiary, Scotts Miracle-Gro has invested $500 million to build this out. That's not chump change.

Muckerman:
It's not small, especially when you consider, in the second quarter, they had $1.2 billion in sales. That's a hefty investment. But they do see that this Hawthorne Gardening Company could be a $1 billion revenue generator for them in the not-so-distant future, if the status quo remains or continues to spread throughout the country. This is, potentially, a way for investors to invest in the marijuana market without investing in a marijuana company. If regulations get pulled back, the federal government steps in, you still have Scott's Miracle-Gro. You still have the base; it's just a different optionality.

O'Reilly:
I have to think, even beyond marijuana, hydroponics, it seems like if they get better and better at offering easy to use products, that's just the tip of the iceberg.

Muckerman:
Yeah, it could expand the urban-gardening movement; it could shrink the size of farms. 

O'Reilly:
Build up.

Muckerman:
Yeah, you see a lot of these private companies building greenhouses out of cargo shipping containers, like you said, building up, they're stacking plants on top of each other. That could be something you see here, and removes the need for soil. This investment could do well outside of the marijuana industry here in the United States.

O'Reilly:
Very cool. Before we head out, it's time for the moment I know you've all been waiting for -- it's the Energy and Industrials clue for IF Puzzle Week. Have you been doing all these, Taylor, or are you going to do them all on Friday?

Muckerman:
I haven't sent in my results, but I feel like I have them all.

O'Reilly:
You do? Have you been doing them on the train?

Muckerman:
Dylan sent me the Word doc the other day. I feel like I nailed them.

O'Reilly:
All right, good for you. We here at the Fool love games. Puzzles and challenges are actually a big part of how we build teams and spark internal collaboration. We love them so much that we've actually had for years a chief collaboration officer and puzzle master, Todd Etter.

Muckerman:
That's not something to laugh at. His games are no joke. His scavenger hunts and internal games, he's done our own Escape the Room twice now. Some people are still in that room. That was months ago. They're still there.

O'Reilly:
Oh, man. That was in November!

Muckerman:
Yeah, they're feeding them juice through a straw under the door.

O'Reilly:
Oh, wow. And Todd won't let them -- no, I'm kidding. [laughs] So in order to get everybody in on the fun this week, we're doing a little something to get all of our listeners in and basically give them a taste of Todd's challenges. There's no Escape the Room challenge yet. Every day this week, each episode of IF is featuring a clue. The answer to that clue is a company name, and the company names from Monday to Friday will all fit into a final puzzle that will be revealed on the Friday Tech show with Dylan Lewis. That's right, you guessed it, if you want to solve the whole thing, you need to listen every episode this week. I guess you could skip to the end of the episode.

Muckerman:
No, because I don't know if we're going to repeat them all. You have to listen to each individual show. Oh, you mean fast-forward to the end?

O'Reilly:
Yeah, fast-forward.

Muckerman:
Oh, I thought you meant wait until the end on Friday. OK.

O'Reilly:
No. So what do you get for jumping through all the hoops?

Muckerman:
Mental hoops, the mental hurdles.

O'Reilly:
The first 10 listeners to shoot us an email after Friday's show with the five company names, and the final answer will get Fool swag. So get your pencils out, get ready.

Muckerman:
Let's repeat that -- the people that send us an email with all the answers on Friday. If you've already sent individual emails, I'm sure we'll be able to work through that. But from here on out, please, hold your answers, hold the phone until Friday, which is tomorrow, so it's not too much longer.

O'Reilly: All right, here is the Energy show clue: If you replace the final letter in the name of this seven-letter energy company with a common three-letter verb, you get a vehicle that often visits the energy company. What is the company?

Muckerman:
[hums Jeopardy! theme]

O'Reilly:
Is that your final answer? You're good at that.

Muckerman:
I watched Jeopardy when I was six.

O'Reilly:
You have a future. Did you see Louis C.K. when he was on Jeopardy!? That dude is smart.

Muckerman: Oh, yeah, he's very smart, which is why he's the best comedian around right now. Comedians aren't dumb.

O'Reilly:
He won like $10,000.

Muckerman:
Some of them might act dumb, but you can't be stupid, making the links that they make and the observations.

O'Reilly:
Before we head out, starting Friday, if you solve every clue, write in to industryfocus@fool.com with the email subject line "Puzzle" and the answers. Also, make sure to tell us your T-shirt size in your email. If you're stumped and still want the reveal, on May 12, we'll be posting the answers to the Motley Fool Podcasts Facebook group, as well as the Industry Focus Twitter account. To enter this contest, there's no purchase necessary, and the contest is open to all legal residents of the United States and Canada, excepting residents of the province of Quebec, over the age of 18. Employees, affiliates, and contractors and their families of The Motley Fool LLC or any of their affiliates are not eligible. Void where prohibited by law. For a complete list of contest rules, visit puzzle.fool.com

Muckerman: What do we have against kids under 18 in Quebec?

O'Reilly:
I have a very strong feeling it's the government of Quebec that has something against radio podcasting contests.

Muckerman:
Well, we're not saying in French -- that might be one of the reasons why. [laughs] 

O'Reilly: 
Oh, boy. I took high school French --

Muckerman:
Yeah, don't even try.

O'Reilly:
I could try to use Google Translate for this if you want. I could try.

Muckerman:
We don't have time.

O'Reilly:
All right, fine. You got all the answers?

Muckerman:
I believe so. I haven't asked if I've gotten them all, but my final answer is a company name, so I think I'm on the right track.

O'Reilly:
All right. That is it for us, folks. Be sure to tune in tomorrow for the Tech show with Dylan Lewis and, of course, the big reveal. If you're a loyal listener and have questions or comments, we would love to hear from you. Just email us at industryfocus@fool.com. As always, people on this program may have interests in the stocks that 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!

Sean O'Reilly has no position in any stocks mentioned. Taylor Muckerman owns shares of Twitter. The Motley Fool owns shares of and recommends Facebook, Kinder Morgan, and Twitter. The Motley Fool owns shares of ExxonMobil. The Motley Fool recommends Chevron. The Motley Fool has a disclosure policy.