The energy sector ‘is going to really be shaped’ by two key factors, strategist says

Tortoise Portfolio Manager Rob Thummel sits down with Yahoo Finance Live to talk about the state of energy markets, oil refineries, U.S. produced energy, decarbonization strategies, and gas and oil prices.

Video transcript

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SEANA SMITH: Oil prices falling more than 6% as the broader market sells off this afternoon. A lockdown in China triggering worries over crude demand. So where is this trade headed? We want to bring in Rob Thummel, he is the Tortoise Portfolio Manager. And Rob, when you take a look at a move like today, oil we know it has been largely on an upswing but taking a hit of just over 6%. How are you looking at some of the selling pressure that we saw in today's action?

ROB THUMMEL: Yeah, that's a good question, Seana. So I think you've got global economic concerns and slowing of growth both domestically and globally, probably causing some concern about oil. And then, of course, you know, there's always geopolitical risks that can swing one way or the other wildly and it seems to be swinging to down to the downside today.

So big picture, the way we look at it, though, is energy is pretty essential globally, and it's going-- and so there are a lot of stocks that are a long ways away from their 52-week highs. So there's some really good opportunities we think in the energy sector by itself.

SEANA SMITH: And Rob, looking at some of that opportunity there, when you're trying to figure out what names make the most sense because there have been a number of beaten-down names within this sector. What are some of the things that you are looking for when you're trying to figure out the best one to buy?

ROB THUMMEL: Yeah, so at Tortoise, our focus is on where we think the energy sector is going, it's going to really be shaped by really two things, energy security and decarbonization, right? And so companies that can provide both of those really are the opportunities for investors. And so we tend to focus on infrastructure stock because those stocks can provide both energy security and decarbonization while providing very compelling free cash flow yields and dividend yields as well.

SEANA SMITH: Rob, when you take a look at one of the things that has been a trend, at least it seems like that over the last year or so within the sector, is the number of refineries closing. We talk about energy independence, what that means here, especially in this country. Why at a time when demand is so high, why do you think we're continuing to see the number of refineries contract? And what does that tell us about energy independence going forward?

ROB THUMMEL: Yeah, you know, that's a very good observation, Seana, that you make. The refinery closures actually were announced well in advance of really this really boom of demand that we've seen recently. And so a lot of that is just carrying through, the refiners became uneconomic or they could consolidate, and so you started to see that happen.

But you're right, what wasn't factored in was really the need and the demand for frankly, US gasoline and diesel and jet fuel that come out of these refineries internationally. There's going to be a big opportunity over the next several years for the US to do export lots of different commodities and US-produced energy but in particular, gasoline and diesel, and jet fuel will be in high demand globally because internationally there have been a significant amount of refineries closed as well.

SEANA SMITH: Rob, you mentioned decarbonization, and I bring that up because we heard from the Department of Energy last week announcing the first steps to allocate more than $2 billion for carbon capture technology in Biden's infrastructure plan. I'm curious just how you see that? How significantly you expect an initiative like that to impact the sector?

ROB THUMMEL: Well, you need kind of-- so we think about it as all of the above, right? So right now, the best way to decarbonize right now, we can do it right now, is displace coal and use more natural gas. And so that's going to happen and that will continue. If you use more natural gas, less coal, that reduces emissions by 50%. Need more solar and wind, that's happening right now. Those are two great ways that are proven that you can reduce carbon today.

Now, what you're talking about, carbon capture, there's a lot of additional things that are-- and energy technologies that can accelerate the pace of decarbonization which include hydrogen, carbon capture, renewable fuels. And so those will be coming in the future, but the most important part of all of this is you need to utilize your existing energy infrastructure to really accelerate the pace of that decarbonization.

SEANA SMITH: Rob, when you take a look at gas prices, we've seen a significant move higher over the last two weeks. We briefly saw some relief at least around here, it seemed like gas prices fell below $4 a barrel, now they're well above that. How long until we start to see, I guess an extended period of relief at the pump?

ROB THUMMEL: Yeah. Well, as most probably anybody who listens to us knows, gas prices correlate fairly strongly with oil prices directionally. So the fact that oil prices are falling today there will-- you will see relief pretty soon, it's usually pretty quick in terms of the correlation. And so you'll start to see gas prices fall if we continue to see oil prices fall.

And frankly, for obviously for the energy sector, for all of us, for the consumer, that's a good thing. And so we expect that to continue to happen. We're going to need more oil and gas production from US producers and from Canadian producers. We'll start to see that and that'll be a relief valve for the consumer in the form of lower gasoline prices.

SEANA SMITH: Rob, do you have any specific picks that jump out to you in a market like this? What makes the most sense when you're looking to put money to work in this sector?

ROB THUMMEL: Yeah. You know, at Tortoise, one of the largest holdings we own is Cheniere Energy actually, it's an LNG liquefied natural gas exporter. The reason why we like Cheniere so much is for a variety of reasons. It's providing energy security, so it's exporting liquefied natural gas to the rest of the world. In fact, 75% of its volumes of its product went to Europe last year or sorry in the first quarter, went to Europe. So it's helping provide energy security. In this case to Europe. It's also decarbonizing. It's using the natural gas as I mentioned, which if you use natural gas instead of coal you reduce carbon emissions significantly.

And then in addition to that, if you look at really across any sector, most sectors in the S&P 500 continue to report declines in earnings expectations or lower earnings expectations, or not meeting earnings expectations. The one sector that continues to outperform and meet and beat earnings expectations and actually increase 2022 EPS estimates and cash flow estimates is the energy sector. And so that's-- we like several stocks in the energy sector, including energy infrastructure for that reason.

SEANA SMITH: Rob Thummel, always great to speak with you, Tortoise Portfolio Manager.