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 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.
EXPORT AUTHORITY POSSIBLE
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.
OIL GLUT
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)
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