Alma Recurrent Global Natural Resources Fund

Market Review and Outlook

In June 2024, presumptive Treasury Secretary Scott Bessent outlined his “3-3-3” plan to strengthen the US economy. One of the three components outlined the need to grow daily oil-equivalent production by 3 million barrels. Is this an outlandish goal? The short answer is “no,” since recent oil-equivalent production has grown at that pace over the last five years. However, after years of apathy, investor focus on the energy patch is re-emerging.

Click here for our 2022 white paper on Shale’s increased strategic importance in a time of ESG

Investment Discussion: Could the incoming administration create a “step-change” in US energy production?
Since the November election results, investors have regularly asked us about how the “drill, baby, drill” mantra would impact energy markets. Furthermore, the designation of Scott Bessent as the presumptive Treasury Secretary further elicited inquiries as a result of his “3-3-3” plan, announced in a Manhattan Institute speech before the election.

What is the 3-3-3 plan?
As a baseline economic plan, the goal is to:
3 – Reduce the annual federal deficit to 3% of GDP, down from the current 6-7% level
3 – Maintain an economic growth target of 3%
3 – Increase oil-equivalent production by 3 million barrels per day

While the first two conditions are worthy of discussion and debate, we receive regular inquiries about the third. When considered in conjunction with the commonly used “drill baby drill” mantra, there is a sense that oil production will grow rapidly. With significant growth, energy related prices would fall, reducing inflation across the economy.

There are quite a few points to highlight regarding this seemingly simple statement.

“Oil-equivalent”
In many reports of the speech, the growth in production referred to only oil production, instead of oil-equivalent production. Oil production in the United States is +/- 13 million barrels daily, according to the EIA. However, Bessent specifically used the term “oil-equivalent” production, to include natural gas liquids such as ethane and propane, as well as “dry gas” production, all converted to barrel of oil equivalent terms on an energy equivalent (BTU) basis.

The addition of that production materially changes the math to 37.4 Million barrels of oil equivalent per day. So when the goal is adding 3 million barrels of oil equivalent per day, 3 million barrels of production increases changes from 3/13 = 23% increase to 3/37.4 = 8%
increase. A much more achievable goal, especially over a 4-year period. Interestingly, since 2019, US oil equivalent production growth has been 2.6% annually, 50% higher than the 3-3-3 plan – which many believe represents an acceleration of oil and natural gas production!

One of the commonly stated means to explain how oil/natural gas production would increase is to reduce regulations, most notably by opening more federal lands for drilling. However, according to the EIA, in 2023 only 12% of oil and 11% of natural gas onshore production was in federal lands, with an additional 15%/2% oil/natural gas from offshore production. These percentages fall much further when accounting for which areas have generated the most production growth in recent years. Easing restrictions would certainly expand opportunity, but is unlikely to provide meaningfully greater drilling opportunities.

One of the most important elements helping to make the US energy market unique is the idea that most drilling for oil and natural gas occurs on private lands, meaning that economics and project returns are the main variables determining whether or not companies will drill for oil and natural gas. While the government’s goal of increased drilling for oil/gas is noteworthy, at the end of the day, companies make investment decisions on behalf of their investors.

Post-election data points not showing significant commitment to production growth
Interestingly, since the November election, Chevron and ExxonMobil announced their 2025 capital spending budgets. Chevron, from its company’s website…”the company’s 2025 capex and affiliate capex budget represent a $2 Bln year-over-year reduction….Permian Basin spend is lower than the 2024 budget….as production growth is reduced in favor of free cash flow”. ExxonMobil announced a CAPEX increase on the surface, but after adding the CAPEX of recently acquired Pioneer, the increase was less than 10%. As industry standard bearers, the generally flat CAPEX between the companies does not reflect a strong growth initiative.

What about the impact of energy production on inflation?
While only two companies, the Chevron and Exxon statements are interesting because they highlight the importance of drilling economics instead of national policy.

Furthermore, many leading (presumptive) government officials like Howard Lutnick have stated that if energy prices fall, then inflation would fall also – in line with our white paper titled “The Great Inflation Misdiagnosis”. However, since shale drilling is short cycle, companies will only drill if there is an ability to earn sufficient returns over a relatively short period of time. Similarly, if commodity prices are too low, then drilling will slow and supply will be restrained until prices rise.

The stated goal of lower commodity prices sounds good on paper, but in reality natural gas prices remain toward the low end of historical experience. Would there be an expectation of accelerating natural gas production growth to then supply LNG export facilities, which deregulation would support? While that is all a reasonable expectation over time, commodity prices would probably be maintained, rather than fall.

In sum, when considering the energy related elements of the 3-3-3 plan, the goals are in line with recent history. Despite talking points which convey exceptional efforts to achieve, recent oil-equivalent production has been growing at a similar pace to the growth outlined in the 3-3-3 plan. While federal deregulation could incrementally augment production growth, companies’ core tenant of investor returns has a much higher impact on production than does federal policy.

Fund

Performance Review
During the month of November 2024, the Recurrent Global Natural Resources Strategy rose +1.32% net of fees. From a portfolio perspective, the US election outcome had a significant impact on performance. Energy and aluminum sectors increased more than 10% during the month, strongly benefiting relative performance. Non-US levered industrial companies performed relatively poorly as a result of the potential impacts of tariffs on the global economy. Diversified metals, gold, chemicals and paper products all fell significantly during the month.