The Impact of Presidential Elections on the Oil and Gas Industry

Which presidential candidate will be better for my portfolio? It’s a common question across all industries and markets. Recent Morningstar research suggest it’s actually pretty difficult to estimate the impact of a US president on the markets. When it comes to the oil and gas industry, Morningstar research is even more declarative. After reviewing the last 36 years of data, history shows oil and gas equity performance is not influenced by who is in the white house.

The data analyzed in this article was sourced from Morningstar Direct. Not a user? Get a free trial of Direct.

Energy has performed better under the Democrats, but we find that to be coincidental to other, more important factors. The same holds true for US production output as it grows regardless of who's in office. We find the energy sector outperforms the wider S&P 500 by an average of 16% during Democratic terms, versus only 3% average outperformance during Republican terms in office. Does that mean we think a Kamala Harris victory would signal a buy for the energy equities? Hardly. Putting that performance into context shows timing and outside factors, in which the US president was largely a bystander, played a much larger role.

Recent history provides the best examples. During President Joe Biden's term to date, beginning with his election, the energy index has delivered a staggering outperformance of 136%! However, the measurement period begins in the depths of the covid-19 pandemic. Meanwhile, this also marks the end point for performance during the Trump administration, largely explaining the decline during his term.

Many other periods of strong energy out or underperformance share similar characteristics.

• Bill Clinton second term: Energy underperforms—dotcom bubble.
• George W. Bush first term: Energy outperforms—bursting of dotcom bubble.
• Barack Obama second term: Energy underperforms—oil price collapse due to US oversupply.

We find valuation, specifically Morningstar's price/fair value, to be a much better indicator of how energy is likely to perform in the coming years compared to CNN polls. In fact, it has proved a reliable indicator during the last 10 years and especially reliable for the Trump and Biden terms.

Preceding Trump's election, the price/fair value stood at 1.3, very overvalued, leading to the subsequent 41% decline in the index and 87% relative underperformance. No, we couldn't have foreseen the pandemic, but we wouldn't have recommended shares regardless. Prior to Biden's election and energy's subsequent 189% return and 136% relative outperformance, the index stood at price/fair value of 0.53, a clear buy. Investors who ignored any common perceptions about which presidential candidate would be best for energy stocks and just bought on valuation were rewarded.

We don't suggest oil and gas companies, or their investors, can expect the same policies in a Trump or Harris presidency. They shouldn't. However, our larger point is that the drivers of energy equity performance are much larger than who sits in the White House and those drivers are inherently unpredictable—unless, of course, one thinks war in the Middle East and skyrocketing oil prices are more or less likely with the election of one candidate over another.

That said, we are keeping our eye on numerous issues that we expect could have different outcomes depending on the presidency.

Inflation Reduction Act: Although largely opposed by the industry, the industry has since come to rely on elements of Biden's hallmark legislation, specifically credits for carbon capture, biofuels, and hydrogen. Reports have large firms voicing their support for the legislation to the Trump campaign, given his threats to gut it.

Federal Trade Commission Scrutiny of M&A: The recent flurry of oil and gas mergers and acquisitions has largely been approved by the FTC, although reviews in some cases have taken more time.

Drilling Permitting on Federal Land: In early 2021, the Biden administration instituted a moratorium on permitting that resulted in the number of horizontal drilling permits on federal land plummeting. Although Harris has opposed fracking in the past, she has not made it a key element of her campaign this year. Although Rystad estimates by 2029 there could be at least 645 mb/d of new oil production coming from undeveloped inventory on federal land, it rates a reinstated ban by a Harris administration as unlikely.

LNG Export Permitting: In January 2024, the Biden administration announced a halt to new LNG export licenses to key Asian nations and other non-free trade partners of the US. It is hard to gauge how a Harris administration might handle the permitting going forward, but it is much more likely to consider a halt than a Trump administration.

Emissions Regulation: Harris and Trump administrations are likely to take different approaches on regulating emissions, with Harris likely to continue Biden's EPA enforcement of methane emissions that was recently upheld in the Supreme Court. The enforcement would result in higher costs that the whole industry is likely to oppose.

So, who will be better for energy stocks Trump or Harris? Who knows? But it doesn't matter. What matters is that the index is trading at 0.92 currently, a slight discount. Unfortunately, it's not the same clear signal we were sending in 2016 and 2020, but it's better than what the polls will tell you.

Looking at our own coverage shows energy to be fairly valued as well at 0.97 price/fair value. Within the integrated oils we think Exxon and Chevron stand out. While APA is an attractive E&P and Schlumberger an appealing service firm, both of which are undervalued.

Ultimately, we think the more critical factor for energy equities is that investors continue to demand capital discipline from these firms. In other words, given the investor-enforced discipline, we do not see firms meaningfully changing their investment plans based on the outcome of the election but adapting and moving forward regardless of the outcome

For more comprehensive analysis and commentary, download the full report from which this article was adapted.

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