Rob Thummel, Tortoise Portfolio Manager, speaks with Yahoo Finance Live about the outlook for the energy sector in 2022 and the role that natural gas will play in the future.

Video Transcript

- Time now for a check of the oil market. WTI crude futures for February settlement just settled at $75, excuse me, and $0.57 per barrel. And I just want to pull up an intraday chart here of WTI and we can see we got some lift off earlier this morning. And, in fact, if we dial it back to last week's price action, we can see in the midst of a five-day rally here, up about 6%.

And for more on the oil markets, excuse me, we want to bring in Rob Thummel. He is the Tortoise Portfolio Manager. And Rob, thanks for joining us here today. Any news on the lift up we got this morning in the oil market or are we just kind of trading in a range here?

ROB THUMMEL: Yeah, you know, I think the news this morning came out of Saudi Arabia, where the Saudi oil minister suggested that we were going to be short oiled in the future, in 2050 or 2040. I think he suggested we could be short 30 million barrels of oil, which is pretty significant. But it's really what's happening in the sector right now.

There's concern about oil supply because of underinvestment that hasn't occurred in the last several years keeping up with oil demand into the future. And so as a result of that mismatch between supply and demand, you've seen prices rise to levels that they haven't been for a while.

- And Rob, I want to ask you what does the outlook look like for you going into 2022 given, you know, we are expecting global energy demand to rise?

ROB THUMMEL: Yeah, so we're very optimistic about the energy sector going into 2022. It outperformed the S&P 500 in 2021, we expect that to continue in 2022 and you say, well, what drives that? Well, if you think about what drives the energy demand in the future, it's continued growth in economy.

So as economies continue to grow, you're going to need more supply of oil, natural gas, and unfortunately even coal because those three commodities really represent about 80% of the total energy supply. So global economies grow, energy demand grows, the demand for oil and gas continues to grow as well.

But we're most excited about natural gas because one of the things that has to happen, and I think we all can agree with this, is in the next several decades we need global decarbonization, we need less carbon.

And natural gas is a great solution because it provides more energy, which the world needs, but also less carbon, which the world needs as well. And so the role that natural gas plays into the future we think is a really critical one and one that the economies around the world can really prosper on, including the US.

- And just thinking about natural gas, the traders-- I come from the Futures Industry so, you know, they call it the widow maker, very volatile. And I'm looking at a year to date chart on the WIFI Interactive, holding onto gains of 57% here but still 25% off the highs.

And a lot of the macro drivers, we're hearing Russia kind of playing games with Europe. I'm just wondering is the natural gas volatility here to stay with us in 2022 or do you see it settling down somewhat?

ROB THUMMEL: Well, yeah, you're right, you're right, it's been wildly volatile in 2021. I hope natural gas does settle in, I think it can, it can be a low cost fuel. And in the US, we're really fortunate that we have a lot of natural gas and as a result of that, the cost is pretty cheap.

Look at what's happening in Europe, the Europeans are having to pay 14 or 15 times the price that everyone here in the US has to pay for natural gas because they're concerned, in Europe, as due to some of the factors that you just mentioned that Europe is going to run out of natural gas. We don't have to worry about that here in the US.

And so as a result, we've got a really interesting opportunity in the US to capture a really valuable commodity and use it to our advantage, and keeping costs low for the consumer and industrial costs lower and prices in general lower. But that starts with reducing volatility and I think you'll see that in the natural gas markets in 2022.

- Which means there may be more interest in investing in energy stocks, which you are a proponent of. What are some of the reasons for doing that?

ROB THUMMEL: Yeah, so what is the energy sector offer that other sectors don't? Two things, number one, a high dividend yield. So you've probably got a lot of people looking, from viewing this program that want dividend income. You know, you can't really get it in bonds anymore, you can't really get it in money markets anymore, so where do you get it? The S&P 500 dividend yield is 1.3%, energy stocks dividend yields are 5% and 6%, so three and four times higher than the S&P 500.

And that's what dividend or that's what energy stocks really offer investors, are high dividend yields and growing dividend yields which are really important in an environment where we have rising inflation. The other thing is, the other fundamental factor is the fact that the free cash flow yields of these companies, they've really changed their business models to listen to investors and provide money back to the investor.

And so companies in the energy sector are offering free cash flow yields that are double the market and they're returning that cash flow back in the forms of dividends and stock buybacks. And those two factors I think usually, those stock market rewards, those two factors when energy companies and other companies in the market provide those.

- And they're not drilling as much either. We have seen the Baker Hughes rig counts on the increase over the year but not really as much as you think we would have had $85 per barrel been in play a few years ago. So I'm wondering in terms of that mindset, are they simply-- is there a price point for crude oil or for any other commodity where you think they turn it back on this figure? They really start pumping and exploring more?

ROB THUMMEL: Well, it's a good question and it's something that everybody has been asking and asking the companies. There has been a shift in focus though from production growth and under a production growth mode, the companies would be doing exactly what you just said Jarrett, increasing the rig count, spending more capital. But there's been a shift to this return of capital and capital discipline, which means not spending the capital on drilling new wells, not increasing the rig count.

And I think until we see some sustained periods of outperformance by the stocks, I don't think you're going to see the oil and gas producers really return to significant production growth anytime in the near future.

- All right, we have to leave it there but appreciate all those insights. Rob Thummel, Tortoise Portfolio Manager.