Inflation Reduction Act: 'This is just a U.S. domestic bill,' energy analyst says

Nasdaq Senior Energy Analyst Rich Pontillo discusses the implications of the Inflation Reduction Act on energy markets.

Video Transcript

- Another angle, again, coming out of that bill is the ambitious climate spending. But what is the impact across the energy complex? And where do prices go from here?

For more on this, let's bring in Rich Pontillo, NASDAQ senior energy analyst joining us remote. Great to have you on the program, Rich, this morning. Look, we were just talking about oil prices earlier at the top of the show. They've been falling, again, Brent below $90 a barrel.

What do you think the story is going forward, especially with this inflation Reduction Act? As I was just talking about with Rick Newman, those provisions won't be kicking in the next few months, but nonetheless, it will have a weigh on the overall energy industry. Will they not?

RICH PONTILLO: Yeah, hey, good morning. It certainly will. I think the impact on actually the price of oil is a bit more mitigated. At the end of the day, that's the commodity that is most consumed globally, about 100 million barrels per day.

And again, too, I think what we need to step back a little bit right now is remind ourselves that this is just a US domestic bill. So there's still international policies that are not quite aligned with this type of framework. So I think that's one perspective to keep in mind.

But certainly if you look at all the renewable energy companies, the solars, the hydros, the winds, they have been rising in anticipation of this passing. And they're all still up today. But I think the expectation was that this would largely be passed.

Of course, a lot of it is just an extension and some enhancements of longer-term tax credits. I think one of the primary benefits to a lot of the renewable companies right now through this piece of legislation is that it really just gives them more long-term visibility, right? So I think if you look at some past legislations, there was a worry that maybe in a couple of years or a new administration comes in, they are removed. I think now with them being extend almost into the next decade, that allows a lot of renewable companies to undertake CapEx projects that are more long in duration, require a lot of capital. They can do so more confidently.

- So, Rich, when we talk about just the likes of ExxonMobil, right, the oil producers here in the United States, a big story has been CapEx. And I wonder if there's any interaction with how this bill biases towards the more climate-friendly industries and emerging industries, whether or not you think that changes the story for the oil and gas companies here in the United States in what they're choosing to spend on projects at the moment.

RICH PONTILLO: Again, on a scale level, not quite that much. Again, if you think about how large these companies are and where the majority of their CapEx goes to, it's large, long-live projects that are more, again, focused on hydrocarbons. But they've certainly been diversifying their portfolios over the last couple of years or have accelerated the diversification of their portfolios the last several years, either by organic growth or also some additions, kind of what they term as bolt-ons. But at the end of the day, they're still largely focused on the hydrocarbons right now.

But again, you've seen a lot more of the industry taking on the energy transition and recognizing that it is amongst us, but again, also emphasizing that it's not going to happen overnight. It's a multidecade process. We're not going to wean ourselves, not only the US, but globally off of hydrocarbons at least in the next 10 to 15 years. And so much of that CapEx still does continue to be primarily reliant on hydrocarbons, but again, diversifying on the margin, continuing to grow that, utilizing some of the organic free cash flow that they've been able to generate over the last year or so and putting that into new investments there as well, largely focused on carbon capture and sequestration.

- Short term, what do you see is the outlook for energy stocks broadly? Because they've been the big winner throughout the market turmoil of 2022. Again, you see what oil prices are doing now. That might hurt the margins at some of these companies. I mean, do you think that it's going to be a rocky road for energy stocks for the rest of 2022? Or what's your outlook?

RICH PONTILLO: Yeah, so I think 2022, again, right, to your point, energy was the most significant outperformer in the market for the first half of the year. It's taken a little bit of a breather in June and July and into August. Again, I think a lot of that is a midyear rebalancing, some consolidation of positions. Certainly you've seen the price of oil come in a little bit.

If you look at over the last couple of weeks the energy companies reporting earnings, I think they were largely in line. There were some beats generally. I think the primary focus continues to be for energy companies, at least here within the US, is shareholder returns. So they've been increasing dividends, increasing buybacks, to your point in the last conversation.

That's what the average investor wants that's invested in an energy company, because they had a bad rap in the prior decade, where they were largely known for outspending cash flow, chasing production growth. And now over the last couple of years, they've become much more disciplined. They're generating free cash flow. So I think from that standpoint, they've continued to do that.

I think one of the main things to focus on through the remainder of this year and into next year is really cost creep. A lot of the companies that reported this past earnings season kept production relatively flat. And a lot of them are forecasting to maintenance production next year. But they did raise some CapEx because of those inflationary factors that are impacting, again, across the board.

- All right, Rich Pontillo, NASDAQ senior energy analyst, thanks so much for joining us. Really appreciate you taking the time.