Drill, baby, drill has been a rallying cry by the incoming Trump administration with the goal of driving up production and bringing down energy prices. Trump has sent a clear message to return to an “all of the above” energy blueprint that supports both fossil fuels and renewable energy sources that include solar, wind, geothermal and nuclear.
The American Petroleum Institute has presented Trump with a list of requests for the industry, including many things that the president-elect has promised to do, like rolling back incentives for producing and buying electric vehicles, restarting permitting for liquid natural gas exports, opening up more land for drilling for oil and repealing or relaxing environmental regulations.
Regardless of what Trump wants, the market still dictates production based on supply and demand. Presidents can try to influence the industry, but market forces still dominate companies’ decision-making. Even as Joe Biden tried to accelerate the shift from fossil fuels under his administration, U.S. oil production has been at an all-time high in 2024.
Oil companies are not going to produce more oil and absorb losses just to drive down prices. The average break-even price of most oil producers varies by region and type of production. Case in point, in the Permian Basin, the break-even price for new wells is around $62/barrel, while for existing wells, it’s about $38/barrel. On a broader scale, the average break-even price for non-OPEC oil producers is about $47/barrel for Brent crude. OPEC has revised and reduced demand forecasts and has responded to falling prices by delaying planned production increases in an effort to stabilize the market.
Assuming these break-even numbers don’t shift too much up or down over the next four years, it stands to reason that as long as the United States can grow GDP by 2.5% or higher, demand for fossil fuels will increase for domestic use. Around the globe, demand has waned, which continues to support the case of the United States being a uniquely strong economy that accounts for nearly 30% of global GDP. And year-to-date, the energy sector has gained only about 5% year-to-date, reflecting the softer global outlook.
Rather than try to figure out the winners and losers in the exploration and production side of the energy investment complex, where there appears to be great uncertainly about costs and pricing, investors seeking steady returns and high yields from the energy sector need not to look any further than the energy infrastructure sub-sector that features pipelines, storage and processing of oil and natural gas. Also known as midstream operations, they manage the movement of oil, gas and liquids from production sites to end users or storage facilities.
Usually, these assets are in the form of Master Limited Partnerships (MLPs), they pay high dividend yields, but also saddle investors with year-end K-1 tax reports that most investors and tax preparers find unfavorable. To resolve this disdain for K-1s, some ETFs are available that own the high-yield MLPs and convert the K-1 income received into 1099 dividend income paid out to investors. It is a hugely attractive feature.
Some choices to consider are:
Alerian MLP ETF (AMLP) — 7.56% Yield
InfraCap MLP ETF (AMZA) — 7.01% Yield
Global X MLP ETF (MLPA) — 7.11% Yield
Check them out. In a market where inflation is proving stickier than the Fed wants and will likely slow the pace of rate cuts, earning 7%+ on inflation sensitive domestic assets where production is set to increase bodes well for future potential dividend increases and capital appreciation.
