From election day to inauguration day, energy stocks were on fire, with the average one in the S&P 500 rallying more than 7% on the hope that the pro-energy Trump Administration would eliminate some of the regulatory burdens that had been holding the industry back. That said, the sector has fallen on hard times since Trump took office, with energy stocks sinking by an average of nearly 10% since that day.
Many factors played a role in driving energy stocks lower since Inauguration Day, most unrelated to presidential policy changes. However, one thing that stood out is that, despite the President's pro-energy stance, there's only so much that any administration can do in one year to fix an industry's problems. That's clear by looking at two examples from last year that show that, despite the President's efforts, he can't fix everything overnight.
From action to delayed reaction
One of the Trump Administration's first actions upon taking office was to grant a long-delayed permit to pipeline company Energy Transfer Partners (NYSE:ETP) so it could finish up its controversial Bakken Pipeline. The company had initially hoped to finish that project in late 2016 but ran into some unexpected roadblocks. Energy Transfer finally received that crucial permit in early February, which enabled the company to not only move forward with the final stage of construction, but unlock some much-needed funding. Oil finally started flowing through the line in June, more than six months behind schedule.
That delay cost Energy Transfer money, both from added carrying costs, as well as lost income. Further, because it couldn't get access to the project-level funding until it had the final permit, the company had to secure costlier financing in January to pay down some debt. The impact of these and other issues weighed on the value of Energy Transfer last year, causing it to tumble more than 25%.
However, the company's fortunes are finally starting to turn around, which was evident in its recent fourth-quarter results where it reported strong cash flow growth to end the year, fueled in part by the addition of the Bakken Pipeline. While it took a while for that cash flow to show up, Energy Transfer might still be waiting for it if Trump hadn't made completing the pipeline one of his Administration's priorities. That said, this example shows that it takes time for a Presidential action to deliver a tangible reaction, and even then the stock might not move in the expected direction.
Reducing the red tape when the ship is sinking
Coal stocks were also expected to get a boost from the Trump Administration's pro-coal stance. However, many slumped last year, including Alliance Resource Partners (NASDAQ:ARLP) and Cloud Peak Energy (NYSE:CLD), which tumbled 19% and 25%, respectively. That's because deregulation alone can't rescue the industry, which is battling a structural decline due to waning demand from utilities, which are increasingly switching over to cheaper, cleaner alternatives.
This demand destruction weighed on the U.S. coal market in 2017, hurting coal producers. For example, Alliance Resource Partners reported a 3.1% improvement in its coal sales volumes last year, to 37.8 million tons, which was mainly due to a strong export market, not rising U.S. demand. In fact, if we strip out the additional 4.7 million tons Alliance Resources shipped overseas last year, sales would have declined 10%. Meanwhile, even though overall sales volumes rose, the average price Alliance realized per ton fell 10.9% last year due to lower coal prices, causing cash flow to slip 3% last year.
Cloud Peak experienced similar problems, reporting both a decline in sales volumes and pricing in the fourth quarter. Because of that, revenue came in much lighter than analysts expected, while its loss was wider than anticipated.
The core issue for coal is that even with the regulatory rollbacks, demand for the fossil fuel is in decline in the U.S. because utilities are burning less of it. Last year, for example, utilities used 1.8% less coal in generating electricity, and that trend isn't expected to reverse since the sector continues retiring coal plants and replacing them with cleaner ones powered by gas, sun, and wind. Unless the Trump administration makes it far cheaper to build new coal plants, demand won't rebound, and neither will the stocks of coal companies.
Presidential policy positions don't always make a great investment thesis
Energy stocks rode the wave of euphoria after the election on the premise that the pro-energy President would ease the industry's regulatory burdens and unleash the country's energy potential. That said, policy changes don't come overnight, and even when they arrive, the desired reaction often isn't immediate. Further, if the fundamental issue impacting an industry doesn't get addressed, regulatory rollbacks alone won't boost the sector's fortunes. That's why buying stocks based on election results doesn't always work, since new administrations can't solve every problem with the stroke of a pen.