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Who Says He’s Unpredictable?

By Robert Rapier on January 26, 2017

As the early days of the Trump Administration unfold, it’s important to keep tabs on the policy choices affecting the energy sector. This week two such decisions have been made, much in line with my recent predictions.

As I warned two weeks ago in Don’t Get Trumped in Ethanol, ethanol companies look especially risky right now. Why? Because the ethanol industry depends on mandates opposed by much of the oil industry and enforced by the Environmental Protection Agency. Plus, the system for ensuring compliance is exactly the sort of a Rube Goldberg device that was bound to drive Donald Trump crazy. So even though he voiced support for the ethanol industry during the primaries, I believed that as soon as he was briefed on how the system worked he wouldn’t like it much.

I’ve advised most investors to avoid the sector, and suggested aggressive investors might even consider shorting ethanol companies. In the previous article I noted that shares of ethanol suppliers like Green Plains (NASDAQ: GPRE), REX American Resources (NYSE: REX) and Pacific Ethanol (NASDAQ: PEIX) had all risen since the election, but warned of action from the Trump Administration that would have a chilling impact on the ethanol sector.

This week it was reported that the president is being briefed on the Renewable Fuel Standard (RFS), and the EPA has announced that it is delaying implementation of the 2017 biofuels requirements set in November. This caused prices for the renewable identification numbers used to track compliance with the biofuel blending quotas to drop to the lowest levels in more than a year — signaling a softer ethanol market.

Ethanol stocks were already in retreat ahead of the news, and their slide accelerated after the EPA delay announcement. Two of the three ethanol stocks mentioned above are down more than 10% since my last story as I write this, and the third, REX, is down 6%. I would continue to avoid this sector given my expectations for what is to come. The renewable fuels quotas will remain, but the EPA is likely to water them down.

Another major theme I’ve focused on since Trump’s election has been his expected impact on energy pipelines. I’ve been predicting since the election that the midstream energy shippers and processors would likely thrive under Trump, and have nudged investors in that direction.

There was also news on that front this week, as President Trump signed executive orders advancing two stalled pipeline projects. One was the Keystone XL Pipeline rejected by his predecessor. Trump asked TransCanada (NYSE: TRP), the pipeline’s backer, to reapply for the permit. The company said it would do so.

The other project backed by Trump is the Dakota Access Pipeline (DAPL). The DAPL, built by a subsidiary of Energy Transfer Partners (NYSE: ETP), has been targeted by protesters in North Dakota. Eventually President Barack Obama intervened (see A Dangerous Precedent) to halt the nearly completed $3.8 billion project.

I believed Obama overreached with his DAPL intervention, and predicted that reversing this policy would be among President Trump’s earliest actions. So what happened following Trump’s executive orders on the two pipelines? In the two trading sessions following the announcement TransCanada shares rose nearly 6%, Energy Transfer Partners jumped more than 8% and the Alerian MLP Index was up nearly 5%.

Hopefully you have been paying attention, and invested accordingly ahead of these moves. Avoiding or shorting the ethanol sector (depending on your investment style) while investing in midstreams has been a profitable stance so far in 2017. But should you want more specific advice, we believe we have a pretty good bead on the direction of energy policy in the Trump Administration. Consider joining us as at The Energy Strategist and MLP Profits for actionable advice that’s been ahead ahead of the curve.

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)


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