The recent market fluctuations have been unprecedented, impacting many areas of the economy and financial markets. We thought we’d take a moment to reflect on what has transpired and highlight the key takeaways that will shape the way we move forward.
What have we learned over the past few weeks?
History has shown us throughout time that markets don’t like uncertainty or surprises. The announced tariffs were a surprise that immediately created uncertainty regarding the direction of the global economy. In addition, the OPEC+ decision to return over 400,000 barrels a day of oil supply to the global market surprised the global oil market and impacted the energy industry. This amount was over 4x the 100,000 barrels of oil expected to be returned to the global oil market in May. These uncertainties and surprises resulted in the rapid decline of stock share prices in the S&P 500 Index and the energy sector.
How did we manage through this?
Our investment process, which includes a comprehensive risk assessment of each investment, guides us through events like the one we are currently experiencing. As seasoned portfolio managers who have been investing in the energy sector for over 20 years, we have experienced several market-moving events such as the financial crisis of 2008, OPEC’s Thanksgiving Day surprise in 2014, and Covid in 2020. Our focus on high quality energy infrastructure companies, combined with deep research and ongoing monitoring, have assisted us in managing through these major market events.
Why were things different this time compared to COVID and why does that matter?
Through every major market cycle, one thing always remains the same – the relationship between global economic growth and global energy demand. There is no economy without energy. That is why global energy demand has increased in 40 of the last 42 years. During periods of market volatility, energy infrastructure is a good place for investors to hide out. The business models of energy infrastructure companies are designed to deliver steady, consistent cash flows because these models are fee-based, delivering consistent annual recurring revenue for the energy infrastructure operators. In contrast, many energy companies, including Exxon and Chevron, employ business models where cash flows are tied to commodity prices. These commodity-sensitive business models experience much more volatility during periods of uncertainty and surprises.
COVID represented a change in the mindset for the entire energy sector. Prior to 2020, the energy sector was experiencing significant growth in production volumes and building infrastructure to support rapid growth in the U.S. tied to the development of U.S. shale. Production volumes were increasing but so were the debt levels of many energy companies as their capital expenditures exceeded cash flows generated from operations, requiring energy companies to raise debt and issue equity to fund cash flow deficits. In 2020, there was a 180-degree change. Capital expenditures were significantly reduced (effectively cut in half) while cash flows from operations remained steady and even increased. For the first time in decades, the net result was that many energy companies generated free cash flow. Today, the energy sector has continued to implement capital discipline and balance sheets are much more healthy with debt metrics much improved from 2020. Energy companies are much better prepared to handle the uncertainty of the economy and the volatility of the commodity prices that we are experiencing today.
How can we continue to be prepared?
Our experience and focus on the energy sector guide us in building proprietary financial models that help us perform real-time stress tests on several different outcomes. In addition, our expertise and strong reputation provide us with direct access to the management teams of all our publicly traded investments. Our experience with previous market disruptions, the results of stress testing our financial models, and conversations with management teams give us conviction that our investments will continue to deliver steady cash flows that more than support current dividend levels. Many of our investments now have excess cash flow to consider buying back stock during periods of market disruption like we are experiencing today.
What can we expect from the energy sector going forward?
Energy is still absolutely essential for every facet of economic development, so the high correlation between global economic growth and energy demand will continue. U.S. shale technology has catapulted the U.S. into the largest energy producer in the world and the largest energy exporter in the world. We expect the U.S. to retain this status for some time. The significance of the energy sector has grown with the emergence of artificial intelligence (AI). Data centers in the U.S. that will house technology infrastructure have pushed the U.S. into being the primary global player in the race for AI dominance.
To achieve this dominance and keep the data centers operating, the energy sector will need to provide electricity 24 hours a day, 7 days a week, 365 days a year. Natural gas will play the most significant role as it is the largest fuel supply source used today to generate electricity. We believe natural gas will benefit from increased demand for electricity and has the potential to gain additional market share from other fuel sources that currently generate electricity. This could mean AI will trigger the age of electricity for the energy sector. The age of electricity will coincide with the age of natural gas, and the energy sector will evolve over the next decade with growth in natural gas leading the way.
How does energy support different types of portfolios in a market environment like this?
Our experience and focus on the energy sector guide us in building proprietary financial models that help us perform In uncertain times like these, one thing that provides some certainty is dividends. As of April 10, 2025, Energy infrastructure stocks provide real, cash income for investors, paying a dividend of 5%+ that is 3x higher than the dividend yield of the S&P 500.
Energy infrastructure assets are real assets that generate high quality cash flows. Since energy consumption continues in all economic cycles, energy infrastructure is a defensive sector because the cash flows are steady and not tied to underlying commodity prices.
We hope this reflection answers some of the questions you may have about the energy sector in the current environment and explains why we believe energy is poised to be a strong contender for your portfolio in the current environment and in the years to come.
To learn more, contact us.
Disclosures
The information in this piece reflects TCA views and opinions as of the date herein which are subject to change at any time based on market and other conditions. This commentary contains certain statements that may include “forward-looking statements.” All statements, other than statements of historical fact, included herein are “forward-looking statements.” Although Tortoise Capital believes that the expectations reflected in these forward-looking statements are reasonable, they do involve assumptions, risks, and uncertainties, and these expectations may prove to be incorrect. Actual events could differ materially from those anticipated in these forward-looking statements as a result of a variety of factors. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this publication. Tortoise Capital does not assume a duty to update these forward-looking statements. The views and opinions in this commentary are as of the date of publication and are subject to change. This material should not be relied upon as investment or tax advice and is not intended to predict or depict the performance of any investment. This publication is provided for information only and shall not constitute an offer to sell or a solicitation of an offer to buy any securities. This publication cites information from other sources. While we believe such information to be accurate, we do not warrant the accuracy of such information. We believe any information presented in this piece that is derived from third parties is reliable, though we do not guarantee its accuracy.
Past performance is no guarantee of future results.
The S&P 500® Index is an unmanaged, market-value weighted index of stocks that is widely regarded as the standard for measuring large-cap U.S. stock market performance. The S&P Energy Select Sector Index is a modified market capitalization-based index of S&P 500 companies in the energy sector that develop and produce crude oil and natural gas and provide drilling and other energy related services. Returns include reinvested dividends. It is not possible to invest directly in an index.