Even as the energy companies look to savor the recent recovery in oil prices after a protracted slump, the U.S. presidential election is seen as posing the next big threat. Morgan Stanley has quickly moved in to quell the anxiety.
In a research note released on Thursday, Morgan Stanley said the regulatory environment for the exploration & production sector and refiners is unlikely to change post the election. The base-case scenario of a split government projected by analyst Evan Calio, if materializes, would moderate any change, even as the two candidates offer differing prescriptions on energy.
Clinton Presidency – A Spoilsport?
With Hillary Clinton's thrust on clean/renewable energy, Morgan Stanley sees her presidency as directionally bearish for the U.S. E&P sector. Clinton has also defended President Obama's Clean Power Bill and the roll back of tax breaks for hydrocarbon producers. Under Clinton, the sector stands to suffer from:
- Competition from subsidized renewable energy, reducing natural gas and oil demand.
- Higher compliance and service costs from environmental regulation.
- Capex rendered expensive due to lower IDC tax deductions.
- Higher short- and medium-term capital gain taxes impacting after-tax returns for investors and raising the industry's cost of capital.
That said, going by its base-case scenario assumption of a split government, where the Democrats control the White House and the Republicans Congress, the firm believes any major policy changes would be knocked off by a Republican-controlled Congress.
Trump's Ascension To Mitigate Regulatory Risk
Morgan Stanley expects a Trump presidency to reduce regulatory overhang, given his clamor for an energy independent America and job growth by eliminating barriers for energy production. Trump is seen to secure IDC reductions, while exempting fracking from the Safe Drinking Water Act.
The firm also believes delays in interstate pipeline projects could be eased and federal land available for drilling could be increased under Trump. That said, the firm expects drilling inventories to limit the impact on NAV or production growth. According to Morgan Stanley, Trump could seek a reduction, though not meaningful, in renewable energy subsidies.
With both candidates supporting the intent of a renewable fuel standard, Morgan Stanley believes either would not prioritize reform despite issues with the framework.
Concluding, Morgan Stanley said the future of the industry hinges on the commodity price and the ability to develop shale resource and not on government policy.
At the time of writing, the Energy Select Sector SPDR (ETF)
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