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Government Intervention Brings Bulls To Energy

May 04, 2020 5:04 PM ETXLE, VDE, OIH, BGR, ERX, FENY, ERY, DIG16 Comments


  • Since the unprecedented lows last Monday, President Trump and other cabinet officials have begun publicly preparing for a plan to bring relief to oil and gas companies.
  • In the absence of government intervention, the industry believes over a third of oil and gas companies would become insolvent, given the decreased price of oil.
  • With confirmation that the government is willing to backstop energy companies, increased exposure to the energy sector is even more likely to add alpha to your portfolio.
  • Looking for a helping hand in the market? Members of The Lead-Lag Report get exclusive ideas and guidance to navigate any climate. Get started today »

We will never let the great U.S. Oil & Gas Industry down. I have instructed the Secretary of Energy and Secretary of the Treasury to formulate a plan which will make funds available so that these very important companies and jobs will be secured long into the future! - Donald Trump

I've been following the oil situation very carefully in the past few weeks. In an article I wrote last week, I talked about the unusual contrast between plummeting U.S. oil prices and the energy sector's superior performance since the March 23rd lows. I argued that, despite the current low demand for oil, and the short-term pain in the energy sector, now may be the time to get into these equities while they're at rock bottom prices. Oil equities and ETFs could rally, even if the price of oil remains low. I said I would not be surprised if we see a bailout package for oil and gas, or if the Fed would start buying oil equities.

Well, it looks like we may be seeing the beginning of federal action. On Tuesday, April 21, President Trump tweeted that he was directing the Secretary of Energy and Secretary of the Treasury to create a plan which would make funds available to the U.S. oil & gas industry. On Friday the 24th, Treasury Secretary Steven Mnuchin confirmed he was considering several options for providing aid to the industry. These measures include a lending program for struggling companies and possibly even taking a stake in some of these companies. President Trump is also recommending that the federal government purchase oil for future use, similar to steps China is seeking to build an inventory of cheap oil to sell off in the future.

The news that a bailout arrangement was in the works and

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This article was written by

Michael A. Gayed, CFA profile picture
Michael A. Gayed is portfolio manager, and author of five award-winning research papers on market anomalies and investing. He has a BS with a double major in Finance & Management from NYU Stern School of Business, and is a CFA Charterholder. Michael runs the investing group The Lead-Lag Report, focused on helping investors outperform in all market conditions. It offers a tactical, data-driven approach to investing, to achieve long-term success even in the face of uncertainty. With increasing market volatility, it's essential to understand risk-on/risk-off signals, seize high-yield opportunities, and leverage award-winning research to maximize returns. Learn More.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This writing is for informational purposes only and Lead-Lag Publishing, LLC undertakes no obligation to update this article even if the opinions expressed change. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services in any jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Lead-Lag Publishing, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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Comments (16)

GivemDaPickel profile picture
Another great article! 
I look forward to your future analysts on the subject! 
Softening your pre Lead-Lag Report forecast for a melt up and a spike in oil prices seems prudent now based on the numbers and all the public information out there.  Nor can I find significant facts or mainstream trusted opinions to the contrary.
Yes, energy is a vital part of national security. Does it matter to national security if Exxon or Shell owns the operation rather than a failed low level, over-leveraged shale fracking company? Let the weak companies fail so the larger, stable companies can buy the assets and produce at a profitable level. It's called CAPITALISM i.e. survival of the fittest.

Remember history class when the pioneers thought the buffalo were an endless, easily exploitable resource... until too many folks got into the game and the market was flooded with product? How did that end up? Too much product on the market, prices plummeted, and the resource was depleted with little overall profit to show for all the work.
with shale money goes into the ground and less money comes back out from the ground. There should be no bailout for this type of mismanagement.
"In the absence of government intervention, the industry believes over a third of oil and gas companies would become insolvent, given the decreased price of oil."

The oilpatch has been a boom and bust game for decades. Most recently, it's been a bust for US oil producers because the Saudi's pump way more into the world market than they should.
This also harkens back about as decade when we were all told that the Gwahar oilfields were in decline.
It seems that you can't rely on talking heads...

KenG3315 profile picture
There is no economic reason to bail out the oil & gas fracking industry. Many of these companies should go bankrupt. There is simply no way for additional investment in this industry to ever get paid back even at $60 per bbl. Trump is as clueless about this business as he is about most topics. Between the Fed intervening by purchasing junk bonds and bailing out mismanaged energy companies, we are doing more damage to the US economy longer term.
Proud Capitalist profile picture
Hey Ken...crawl out from under your rock. You do know there is a pandemic going on right? Our oil industry is a strategic asset, and one that should be protected during these harmful times caused by China...likely intentionally.
I couldn't agree with you more, but what it all boils down to, is that Trump is protecting his base...securing votes. Simple as that. No different than his subsidizing $billions for the farmers, securing that base as well, despite the fact that the small farmers are going broke. I'm sure it will be no different for the oil patch. Most of the money will go to the big boys, who have the connections.
the assets would still exist. the assets do not go bankrupt, the equity holders do. the existing ownership would be wiped out. new owners would come in and operate those assets. you could characterize it as Darwinian. The CEO level managers have been rewarded for years for their mismanagement. Bankruptcy is the rightful outcome. This is the function of capitalism. You could call it Proud Capitalism.
Did I hear correctly that Trump is allowing oil companies to use the Strategic Reserve to store oil for a part of the oil FREE instead of payment? Seems to me a win-win for the business.
Trump will save the oil companies because it’s good for the economy & essential to our National Defense!!
Never be held hostage to foreign energy.
True, but he is more likely doing it for the votes.
Proud Capitalist profile picture
Moronic...not many votes in bailing out oil companies. Maybe he's doing it because its the right thing to do. I know...hard for a liberal to believe because everything they do is about buying votes.
EricRyan profile picture
@Proud Capitalist the oil shale companies are WEAK. Many of them should die, come under new ownership and slow production to the point it befits actual demand instead of burning through cash and finite resources. The flaring of natural gas for one is a national and environmental travesty.
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