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GOP Senate takeover could boost sagging energy stocks

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[October 28, 2014] By David Gaffen

NEW YORK (Reuters) - Investors stung by plunging oil prices and energy stocks may find relief right around the corner: A Republican-led U.S. Senate could well jump-start energy-friendly policies that would shore up the beaten-down sector.

Political oddsmakers say Republicans should win the Senate in next week's mid-term elections. Although major reforms on big issues like taxes or immigration are thought unlikely, GOP control of Congress could see laws advanced in a handful of areas, with energy topping the list.

A U.S. oil and gas investment boom has brought growth in employment and production in recent years, both in hydraulic fracturing, or fracking, and horizontal drilling.

U.S. oil futures on Monday dipped below $80 a barrel for the first time in 28 months, and investors are worried about a supply glut now that U.S. oil production exceeds that of any other country, according to the U.S. Energy Information Administration.

Now, those with a stake in the sector hope a Republican Senate takeover will lead to reform of export laws, speed up approval of oil and gas pipelines, and motivate the Obama Administration to pursue broad trade agreements that could also increase energy exports.

"The oil and gas industry is enjoying what I call a halo effect, when America becomes the No. 1 producer of oil and it is contributing to an economy that's kind of slack. You talk less about raising taxes on oil and gas," said Jim Lucier, managing director and head of the energy practice at Capital Alpha Partners in Washington.

"Sooner or later we need to reach a decision on exports. That's where investors are focused more than anywhere else," he said, referring to a push by producers to lift the U.S. ban on exports of crude.

For financial markets, energy eclipses other issues that may also find traction under Republicans, including a potential repeal of the medical-device tax that is part of the Affordable Care Act, which could be a positive for the healthcare technology sector, or slowed adoption of online gaming, which could boost casino stocks.


Obama's past willingness to consider crude-oil exports and the potential for approval of the Keystone XL Pipeline that will carry heavy oil-sands crude from Canada's Alberta province to Nebraska could be a boost to the worst performing U.S. sector in 2014. The S&P Energy Index <.SPNY> is down 5.6 percent year to date.

Export approval would "put a floor under the price of oil once we say it can be exported you've created a market for it," said Da5niel Clifton, head of policy research at Strategas Research Partners in Washington.

Oil production from North Dakota's Bakken formation, the heart of the shale oil boom, neared 1.1 million barrels a day as of August, compared with about 380,000 bpd three years earlier, according to state data.

Stocks of the biggest shale players have dropped recently as oil prices have dropped. Continental Resources, one of the largest Bakken producers, has fallen 28 percent in the last three months. Whiting Petroleum Corp is down 35 percent, and Oasis Petroleum Inc has lost 48 percent.

Oil and gas companies have been heavy supporters of Republicans in this cycle, contributing more than $37 million so far to mid-term races, with 87 percent going to Republicans, according to the Center for Responsive Politics, which tracks campaign donations.

Lucier of Capital Alpha said the "technocratic elite in DC is more or less completely on board with exports," but said the public has been less receptive.

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Fear that gasoline prices at the pump, which have recently declined to near $3 a gallon for the first time since 2010, would spike, drives some of the opposition. Some investors are skeptical that crude exports will be quick to materialize.

According to Gary Bradshaw, portfolio manager at Hodges Capital Management in Dallas, who holds Continental and Oasis, shale company stocks are signaling that "their production may not be as strong going forward."

Bradshaw said he did not expect crude exports will happen in the near term, which should hurt shares of U.S. energy producers. "If you look at them, they're all down 30-40 pct since their highs in June," he said.


Lucier said increased access to world markets would be a boon for U.S. energy companies, adding that the capital intensity of fracking could mean that without firmer oil prices production may be cut, which would affect jobs.

"An oil glut in the U.S. and price of oil dropping precipitously is a big risk," he said. "Stock prices not only reflect the potential upside, but the risk of downside of that event, where we don't have access to the market, an oil glut materializes and everyone gets hurt."

On a more local level, Pennsylvania's incumbent Republican governor Tom Corbett is in danger of losing to Democratic opponent Tom Wolf, who has proposed a fracking excise tax in the state, similar to one in West Virginia.

Should such a measure pass, it may affect operators such as Range Resources Corp and Chesapeake Energy, ranked first and second in wells in Pennsylvania. Range Resources' political action committee has donated $16,000 to Corbett and none to Wolf.

Even with Pennsylvania, however, Lucier points out that "as time goes on, we're really seeing a much more benign outlook for fracking."

A backlash against a proposed fracking-restriction initiative in Colorado threatened the re-election hopes of Governor John Hinkenlooper and Senator Mark Udall, both Democrats, and was jettisoned entirely.

"They pulled it because the pro-fracking turnout was so high it was putting Governor Hinkenlooper and Senator Udall in trouble," said Lucier.

Pulling the initiative may not help - polls show both incumbents are facing tight races.

(Editing by Alden Bentley)

[ 2014 Thomson Reuters. All rights reserved.]

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