Energy Transition Outlook 2025 – Key Investment Opportunities

Key Takeaways

»    U.S. crude and liquids production achieved new highs, driven by improved productivity and stable rig counts.
»    Global energy supply remained steady despite geopolitical tensions, with rerouted supply chains minimizing disruptions and volatility.
»    Energy sector M&A transactions surged to $94.5 billion in the first three quarters of 2024, nearly doubling 2023 levels, as companies sought scale and productivity gains.
»    Delays in renewable targets highlight the continued reliance on hydrocarbons, while natural gas gains importance as a reliable, cost efficient energy source.
»    We believe opportunity potential for the Hennessy Energy Transition Fund can be found in natural gas upstream equities and midstream companies.

Would you please comment on developments within the Energy sector in 2024?  

The U.S. continues to be an engine of growth when it comes to energy production. In 2024, U.S. crude and liquids production established a new record, despite moderating activity levels and steady rig counts. This means productivity gains for liquids, crude oil and natural gas continue to drive volume expansion in the U.S. in a range-bound commodity price environment. 

In addition, despite two major conflicts around the world—the war in Ukraine and tensions in Syria—there have been minimal energy disruptions. Supply routes have essentially been remapped and the price of oil has remained subdued in terms of volatility. For example, NYMEX WTI crude oil has traded between $65 and $86 per barrel over the past year.

However, the Energy sector’s weighting in the S&P 500® Index continues to be near an all-time low of approximately 3% compared to its 10-year average weighting of 9%. This reduced weighting is partially due to the outperformance of Technology in recent years. Given attractive longer-term fundamental drivers, sector appeal should, over time, gradually reclaim investor favor, ultimately setting the stage for an improved weighting in the S&P 500.

Would you please discuss merger and acquisition (M&A) activity in the Energy sector over the past year?

In 2024, we saw a higher level of M&A activity 
in the upstream sub-sector on a year-over-year basis. At the end of the third quarter of 2024, M&A transactions totaled $94.5 billion, essentially double the deal value during the same period in 2023, which was $47 billion. M&A continued to be a primary theme as upstream producers have a desire to build scale and achieve both productivity gains and cost efficiencies.

In 2025, we expect sector consolidation trends to persist. Mid- and small-capitalization companies will likely continue to focus on expansion in existing areas of operation. We would also expect to see some exploration and production (E&P) companies look for entry points in secondary basins where they do not have a significant position. We believe areas such as the Mid-continent and Rocky Mountain regions are appealing candidates for operator consolidation. In our opinion, management teams will remain focused on the pursuit of scale operations, which can improve investment appeal and, in turn, attract investor capital.

How might the new administration’s energy policies impact energy companies? 

Overall, we anticipate a loosening of restrictive regulations, including improved access to federal lands and an ease in permitting impediments. Most notably on a near-term basis, we could see the pause on liquefied natural gas (LNG) export facility approvals lifted.

The new administration may revisit the Inflation Reduction Act to repeal subsidies for uneconomic technologies on a go forward basis. However, given the significant installed base of various renewable projects nationwide, executive actions may prove to be more balanced rather than punitive. Going forward, we anticipate solar power projects to continue to advance while wind and hydrogen projects may be challenged. 

We believe the incoming president sees the U.S.’s abundant energy as a source of strength. His administration could continue to work to unlock that resource and make it available to trade partners, which poses a challenge to our geopolitical rivals. In this environment, we could see the hydrocarbon sector continue to grow.

Where are you finding opportunity across the value chain?

We believe the following sub-sectors look attractive:

1.    Natural gas upstream equities as the demand tailwinds are visible and tangible. Many upstream producers can generate significant cash and reduce debt and engage in shareholder friendly actions such as raising their dividends and repurchasing shares. Looking ahead, we should see increased export volumes and additional natural gas demand from artificial intelligence use.

2.    Due to the current natural gas market, midstream companies are also positioned to benefit. Increased gas consumption will drive volume growth across the midstream integrated value chain, benefiting those companies operating assets that facilitate the transport of natural gas from well head to burner tip.

What is your outlook for Energy companies?

Over 2025, the energy sector will likely be shaped by macroeconomic dynamics, geopolitical risks, and the evolving energy transition. Broadly, global central banks, including the Federal Reserve, are focused on preserving stability and maintaining sustainable growth. Against this backdrop, the global population continues to expand, driving steady energy demand, despite uneven growth in China and geopolitical uncertainties.

Across specific areas of energy, we see the following:

•    Oil. The scenario for 2025 is expected to resemble 2024, with prices likely remaining range-bound between $65 and $80 per barrel. While temporary overshoots are possible, OPEC’s commitment to maintaining price stability supports this forecast.

•    Natural gas. Markets present a tighter outlook, driven by increasing global demand and constrained production capacity. In the U.S., LNG export growth, combined with industrial onshoring and the powering of artificial intelligence (AI) systems, are contributing to substantial near-term supply needs. Additionally, Europe’s growing reliance on LNG, due to reduced dependence on Russian gas and higher renewable penetration underscore the importance of natural gas as a backup fuel, particularly during periods of weak wind and solar energy performance or increased seasonal demand.

•    Transition to cleaner energy.  Progress is slower than initially projected. For example, Canada recently extended its net-zero electricity grid target from 2035 to 2050. This delay highlights the prolonged reliance on hydrocarbons, reinforcing the necessity of traditional energy sources during the transition period. These challenges are further evidenced in Europe, where renewables sometimes fail to deliver consistent power, prompting a return to natural gas to ensure grid stability.

Overall, corporate governance in the energy sector has favored shareholders in recent years, and this trend is expected to continue. We believe high-quality energy companies are well positioned to deliver strong returns through disciplined capital allocation, reflecting debt reduction, share buybacks, and dividend increases.

As we enter 2025, how do valuations in the Energy sector look relative to the overall market? 

We believe Energy companies remain attractively valued relative the overall market. As of December 31, 2024, the 2024 Enterprise Value (EV) to EBITDA for the S&P 500® Energy Index was 6.8x, significantly lower than the overall S&P 500® Index, which traded at 16.6x  EV/EBITDA as of the end of the year.