The State of U.S. Energy

Ryan Kelley, CFA, Portfolio Manager of the Hennessy Gas Utility Fund and Ben Cook, CFA, Portfolio Manager of the Hennessy Energy Fund and Hennessy Midstream Fund recently shared their insights on the natural gas and energy sectors.

February 2022
  • Ryan C. Kelley
    Ryan C. Kelley, CFA
    Chief Investment Officer and Portfolio Manager
  • Ben Cook
    Ben Cook, CFA
    Portfolio Manager

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Key Takeaways

•    Renewable energy is expected to be the fastest growing fuel category over the next 10 years, and we see natural gas growing as a companion to renewables due to its abundancy and varied use applications.

•    Historically, when inflation and interest rates have risen, the Energy sector has outperformed the broader market. 

•    As commodity prices rise, many hydrocarbon energy-producing companies should generate rising levels of cash, offsetting the negative inflationary impact on consumer purchasing power.

•    Natural gas utilities’ earnings growth is expected to strengthen due to the growing importance of natural gas and its usage, an increasingly accommodative regulatory environment, and a large undertaking in pipeline replacement and modernization.

•    The projected annual earnings growth for natural gas utilities should double from its historical 3%-5% to 6%-8%. 

•    We see the reopening of the economy driving a rise in energy demand of all kinds, which should be beneficial for midstream pipeline companies and LNG exporters.

Hennessy Gas Utility Fund Highlights

•    Since the Hennessy Gas Utility Fund’s inception over 30 years ago, there has been no significant correlation between the Fund’s performance and the direction in interest rates.

•    Within the Fund, 45 out of 48 companies pay a dividend. The average dividend yield of those companies is 3.55% as of 2/20/22,1 with a 4.2% average 3-year growth rate.

Energy Companies Appear Attractively Valued

•    U.S. Exploration and Production (E&P) companies trade at a 65% discount to the S&P 1500 on an EV/EBITDA basis, which is larger than the 5- and 10-year average discount of 45% and 35%, respectively.

•    Sector MLP valuation is currently trading at 8.1x on an EV/EBITDA basis using 2023 figures, which is 14% below the average valuation range of 9.5x on a 5-year average historical basis.

 

 

 

[1] Current and future holds are subject to risk. [2] The 30-day SEC Yield for the Hennessy Gas Utility Fund (GASFX) was 2.29% as of 1/31/22. [3] - Arithmetic average dividend yield is calculated as the sum of all dividend yields divided by the count of that series of numbers.

EBITDA is the acronym for earnings before interest, taxes, depreciation, amortization.

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