Miller/Howard Investments

Bloomberg Panel - Trump's Impact on Financial Policy: How does "America First" impact your portfolio?

Recorded July 6, 2017

Nathan Dean: So Michael Roomberg is the co-lead portfolio manager for Drill Bit to Burner Tip. As the mouthful of the name implies, the portfolio makes equity investments across the entirety of the entire energy value chain. The portfolio has a particular emphasis on natural gas. We'll talk about that a little bit. He's with Miller/Howard. In addition to more of the traditional energy companies, which Michael believes provides the opportunity and to manage more effectively through what seems like shorter and shorter energy cycles, the portfolio is purely North American focused. Prior to joining Miller/Howard, he counted Miller/Howard as a client, as a sell-side at various banks and covered various sectors including industrials, energy, and water. He is a CFA and has earned his MBA Georgetown with honors.

Now what I first wanted to start off with was just some general thoughts about President Trump, and his impact so far. You know, you both have different sectors, different portfolios to manage, but any thoughts for our audience today right now on the market since Donald Trump's inauguration? The Dow Jones in November 2016 was like 17898, the day of the election. As of this morning, it was 21136. Any surprises, anything that you thought was going to happen, or not happen, but just could you give us a four month look-back?

Michael Roomberg: We had kind of a junk-led beta rally in the wake of the election, the energy sector jumped, through the next six weeks following the election, about 15%, and since then it's down about 20% from the high-water mark. Obviously that's much more crude and macro-driven than it is policy-driven, there really hasn't been much of a change with respect to policies, and legislation’s been stagnating.

One of the sectors that really we saw as a firm, a lot of investor interest, was the engineering construction sector, on the premise that all of these companies were going to build a 2,000 mile wall, and wouldn't have to pay any taxes on the earnings that they generated from that. Some of those companies were the highest fliers towards the end of the year. And now, having just checked this morning, have mostly pretty much retraced all the gains post-election.

So I think we're kind of back to where we started, in a way, of two candidates, one of whom was known, the other of whom was not known, and probably is still not known. And I think that's what markets are figuring out, both on the energy side, and on the broader.

Michael Roomberg: On the energy side, this is probably something that you won't hear from too many energy managers, but I think it speaks to sort of the tail risks that are existent with respect to regulation. The portfolio I manage is mainly focused on shale oil and gas. Predominantly natural gas. When we think about this technology, it's a disruptive technology, it's a deflationary technology, it has gained widespread bi-partisan acceptance as a consequence of the fact that it has widespread popular support. Folks like cheaper energy. Despite some of the hysterics around the issue, there's been over 200,000 wells that have been fracked in the United States since the 1950s. As long as there is good regulation in place, that can be done safely.

If we look back to the wake of the election, there was a lot of high-fiveing amongst various energy executive that I knew. They now had a friend in Washington, quote unquote. But that can cut both ways. Good regulation is important, and if I look at the example of Oklahoma, most people here have probably heard in the news that there are a lot of earthquakes in Oklahoma, as a consequence of disposal of wastewater from shale drilling. This is a known scientific issue, if you have a fault that's underground, and you dispose large volumes of water into that fault, you could run a risk of generating an earthquake.

In many states, they have regulations that require setbacks away from those disposal locations, and they hadn't had those in Oklahoma for a long period of time. If those regulations that exist in other states are pressured to be rolled back in states where there's perhaps a bigger population relative to the size of the indigenous oil and gas industry, such as even Texas, or Ohio, or Pennsylvania, that could run the risk of an accident and a turn in popular perception towards the industry.

So, I kind of offer that up as something that I think people don't think about, but is an important aspect of regulation, that we sort of benefit from a Goldilocks regulation here in the United States. I think at the end of the day, that's going to be the prevailing wisdom in this administration too.

Nathan Dean: Michael, when Donald Trump announced they were going to pull out of the Paris Accord, I read some reports from energy analysts saying it may not be that big of a deal on the coal industry. Can you give us your outlook of this mentality, and does it have an impact?

Michael Roomberg: There's not a single analyst on Wall Street that's changed, even a rounding error of a number, in relation to their forecast for the expectation for coal, oil, and gas as a result of pulling out of the agreement. I think, to Henry's point, it is more about a global leadership issue.

To speaking to coal, I've said this in the past. At current gas prices, clean coal is a fiction. There's one plant that's being built right now by Southern Company, called the Kemper Plant. And that plant is three years, I'm sorry, six years into a three-year construction project. It's three billion dollars over-budget, and can't make any money at sub-five dollar natural gas prices. Well, natural gas prices haven't been above five dollars in 10 years. So the wisdom of going back in that direction seems pretty misguided, in our opinion.

If you just look from a jobs perspective, a policy perspective, there's three and a half times more people employed in the oil and gas industry than there are in the coal industry. In fact, there's 50,000 people employed in coal. There's about 70,000 employed at Arby's. So the ranking of coal in the continuum of importance is, I think, is probably going to decline. If we think about, most of these things, most of the decisions, are made at the state level. And so, the regulators at the state level all have their own individual objectives, and it's unlikely that they're going to comport with the federal government's policy. But at the end of the day, I think that no investor is going to put a large capital investment that may have a seven to 10 year payback period, simple cash on cash return, in a coal plant when you have an administration that, at its longest, is only going to be here for seven years. So I just don't see that as being a major factor.

Nathan Dean: I mean, I've had several energy analysts, and I'm not an energy analyst, but just talking to them, say that if you compare Donald Trump to Barack Obama, you may actually come out with a similar story about how things have worked so far. Is Donald Trump answering the rhetoric with actual policy goal, or is he actually trying to deliver on policies that he's put in the campaign?

Michael Roomberg: I think it's a great question. The shale revolution occurred under Obama, it didn't happen because of Obama, but it didn't happen in spite of him either. Today, we have an abundance of oil and gas, a glut of oil and gas, and prices remain low. I think the best thing the administration could do is pursue policies that increase the demand for these products.

One of the things that we've heard a little bit about without any real specifics yet, but is encouraging, is LNG exports. There is no better way for Donald Trump to deliver on his dual campaign mandates of creating good skilled-labor jobs, and narrowing the trade deficit, than pursuing additional LNG export agreements with places like China, India, Korea, and Japan. China and India are going to double their imports of LNG over the next five years.

There are currently six LNG export facilities that are under construction in the United States. Each of these is a multi-billion dollar project. There's about 3,000 construction jobs directly on site. And if you consider the entire value chain that supplies that facility, whether it's the pipelines, or the drillers in the field, or the regulatory folks, or all the way down to the country store that has to serve the workers out in the field. All told, one of these facilities will generate about 10,000 jobs.

And so, this is something that is incredibly potent from that perspective. It's one of the few things that the United States manufactures that is cost competitive with the rest of the world. So I think one way to translate some of this protectionist rhetoric and sort of brouhaha at the negotiation table. Obviously Rex Tillerson is aware of this, and Gary Cohn, and certainly Donald Trump, is to talk to these counterparts, and say, "My entire candidacy was about becoming more equal partners with you in trade. If you would like to avoid or avert a trade dispute, perhaps buying more of our LNG would be a good way to start."

Nathan Dean: So you mentioned LNG, and I have to ask this question because of it. Do you see Donald Trump playing a role in the Qatar-Saudi Arabia debate? Is there a market impact, or several of our analysts put out a note saying that you should just keep calm and carry on. What are you thinking?

Michael Roomberg: Well it's a great question. So, this is obviously a bit of a Byzantine conflict, and one that I don't think will have a big macro impact. But what it does do is remind LNG buyers that Qatar, which provides 30% of the world's LNG, that diversity of supply and security of supply from various places is equal to or greater in importance than price. The country of Japan, their entire economy would shut down overnight if they had no access to regular LNG imports. So I do think it's something that we can capitalize upon.

In terms of that individual conflict, I've seen mixed media reports about whether the U.S. is kind of supporting one side versus the other, whether there's legitimate claims, or it's sort of just a historical grievance. The U.S. has 11,000 active service members stationed in Qatar, and I think the world is full, generally speaking, of kindling, and its best to kind of take the matches away whenever we can as a policy, and hopefully that will ... I say that strictly from the portfolio management standpoint, because I think it's important for risk.

Nathan Dean: So the first question I have for Henry and Michael is are we underestimating the medium/longer-term risks of the current administration impact, given that almost 75% of the Cabinet positions are not appointed, most don't even have a candidate. Given that it is the Cabinets that will implement the policies, is this something that we should be taking more into account?

Michael Roomberg: I would say that, “the old saw” that markets likes, kind of gridlock or status quo, I think is a good thing. I think it's an accurate one. And if you look back to the Obama years, it wasn't necessarily that Obama was the best President for stocks, or that he was the worst. It was that there was this sort of stalemate between Obama and Congress, and I think that led to an environment where there was a little bit more of an understanding of the parameters of where we are.

With Donald Trump, clearly we're in uncharted territory, and markets have a great ability to not look more than one horizon over. And so, certainly there's probably long term implications of this presidency. I think there's probably even greater long term implication of the movement that spurred his candidacy and his presidency. How do you create jobs for people who are inevitably going to be laid off when five million truckers and taxi drivers lose their jobs to automated vehicles? These are real serious policy problems that need to be solved, and I think the most encouraging thing for the markets long term that you'll have thoughtful policymakers that are competent and can think about these issues, and how to address them in a way that is least disruptive for society.

Henry Peabody: I'd go back to the currency issue, and geopolitics, and one of the main risks that's being underappreciated. The S&P hit highs, I don't think factors that in, all that said it's a very hard event to trade in the short term. I think your point about employment is a real one, and does there need to be a conversation about some sort of universal basic income, I think that that's probably something we need to discuss in the next handful of years. Not necessarily enact something, but certainly have the discussion about displaced labor.

So yeah, I think that the market is underappreciating some of the risk, particularly on the geopolitical side. Yeah, I do.

Michael Roomberg: But I think, I just want to, I agree with everything you've said. I also think that the market has an underappreciation for the power of compounding growth over time. And so, there are still plenty of opportunities. There's going to be plenty of opportunities around the automation of vehicles that are going to create great wealth. It's going to change the way that we live geospatially, in terms of the way that we organize our lives. I wouldn't mind commuting an extra 45 minutes if I didn't have to actually operate the vehicle and could work and do e-mail.

So I think that there's great opportunity and great promise, but also a lot of risks, and that's why having competent leadership is more important than any real ideology.

As an energy manager, I have to make a plug for energy. The rise of autonomous vehicles will actually be one of the biggest net positives for natural gas of anything that could be, and electric vehicles, of anything that could come on the horizon. Because where does that power come from? It's not going come from windmills, it's going to come at night when you're sitting in your garage, and we'll be commuting longer distances. I just highlight that because there are opportunities in areas where a lot of people view just risk.

Nathan Dean: And one of the questions here is directly to that point. They're asking, “Where is the price of oil headed?”

Michael Roomberg: Where is the price of oil? I don't know. Do you know? Look, here's what I think. I think that shale caps the price of oil on a soft basis around 60 dollars a barrel. At that point you see west Texas, North Dakota, South Texas light up with rigs, and push the price back down again. If you are to drill a well, an individual well in the best area of west Texas, the breakeven prices are about 35 dollars a barrel. You add in the corporate overhead, and your breakeven average company operating in the shale basins is probably requiring about 50 dollars a barrel.

In the Middle East, Gulf states, the actual direct costs of production might be only 10 dollars a barrel. But if you added in the cost of keeping peace and stability, and all the social governance programs, those countries ... very few of them are fiscally sustainable at sub-60 dollar oil indefinitely. Frankly, I think one of the biggest bull cases for oil over the longer term is that one or more of these countries is no longer perceived to be a reliable source of supply for the world.

Now OPEC could abandon this agreement. Frankly, they should have finished the job rather than talk about a freeze 18 months ago, I think that would have been more beneficial. But for the cartel, not necessarily for shale, but I do think that they can't sustain another price war, so they're kind of in a position where they burned through a lot of their rainy day funds, and while there could be volatility between here and there, the long term bull case for oil, I think, is just that. That the U.S. is a safe, and secure, and politically reliable place that will continue to take market share from places abroad.

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