"It’s About Keeping Your Eyes On The Horizon" Featuring Neil Mehta & Carly Davenport, Goldman Sachs
Mar 5, 2025
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Neil Mehta, Managing Director at Goldman Sachs, and Carly Davenport, Vice President of Equity Research, discuss current trends impacting the energy sector and utilities. Neil highlights a shift toward selective stock performance amid fluctuating commodity prices, emphasizing the need for capital efficiency. Carly delves into the rising power demand boosted by AI and data centers, exploring how utilities are adapting. They also address the critical role of management quality and the complexities of power pricing dynamics, offering valuable insights for investors.
Significant performance dispersion in the energy sector highlights the importance of operational execution and capital allocation among companies amidst market volatility.
As demand for electricity surges, utilities are revising their investment strategies to match growth, favoring regulated companies over those facing operational challenges.
Investor confidence increasingly hinges on management quality and governance, underscoring the need for companies to communicate long-term strategic plans transparently.
Deep dives
Current Market Volatility and Economic Indicators
Recent market conditions reveal significant volatility, particularly within the equity markets and bond yields. For instance, the Dow Jones experienced a drastic drop of 850 points, illustrating the current uncertainty among investors. Meanwhile, the bond market hints at potential interest rate cuts, showing concerns around tariffs impacting U.S. economic growth. Observations suggest that the S&P 500 is at a critical juncture, trading near its 200-day moving average, which may lead to further declines if the downward trend continues.
OPEC's Impact on Oil Prices
OPEC's unexpected decision to increase crude oil production has contributed to a wider perception of market instability, with West Texas Intermediate (WTI) prices hovering around $68 per barrel. Analysts highlight that the market is currently oversupplied, fueled by OPEC’s proposed increase in output by 135,000 barrels per day, which is seen as inadequate to alleviate existing supply-over-demand concerns. This shift may disrupt the market's previous expectations regarding production increases in the latter half of the year, leaving investors uncertain of OPEC's strategy. The emerging consensus is that these decisions may reflect a more complex view on global supply dynamics, considering factors like Iran's market share.
Earnings Season Highlights and Stock Dispersion
The latest earnings season indicates a trend where stock performance dispersion is highly pronounced within the energy sector, with some companies significantly outperforming others. This is evidenced by firms like Suncor exhibiting strong results against peers like Synovus, which underperformed due to missed expectations. Such disparities extend across various subsectors, suggesting that investors are increasingly selective in their choices, rewarding operational success while punishing companies failing to meet market expectations. As a result, companies are urged to focus on improving capital allocation and management performance to remain competitive.
Utility Sector and Power Demand Trends
As demand for electricity rises, particularly in regions like the Southeast, utilities are adapting their capital investment strategies to reflect this growth. Despite high energy demands, the earnings growth for utilities has not consistently translated into stock performance, with many investors seeking companies that can demonstrate both operational execution and earnings guidance. The recent earnings releases showed a stark contrast, with some utilities maintaining strong earnings growth projections, while others like Sempra suffered due to decreased growth expectations. Analysts note this disparity highlights a market favoring regulated utilities with low risk and stable growth over those exposed to unpredictable operational challenges.
Investor Sentiment Towards Management Quality
Investors are increasingly assessing management quality as a critical component influencing stock performance, often focusing on long-term shareholder returns and operational safety. Companies demonstrating consistent financial performance and proactive strategies in response to underperformance attract positive investor sentiment. In this context, robust governance and management depth—ensuring capable leadership beyond just the top executives—are vital to fostering investor confidence. As shareholder engagement grows, especially in light of operational concerns, companies are encouraged to maintain transparent communication regarding their long-term strategic plans.
Today we had a fantastic session with Neil Mehta, Managing Director and Head of North American Natural Resources Equity Research, alongside his colleague Carly Davenport, Vice President of Equity Research, with Goldman Sachs. Neil joined Goldman in 2008 and oversees research coverage across oil and gas, utilities, midstream, metals and mining, and clean technology, while also leading coverage for large cap energy equities. Carly joined Goldman in 2016 and covers U.S. utilities. She previously covered SMID cap refiners and was a member of the integrated oils & refiners team. With energy earnings season wrapping up, we wanted to reflect on key takeaways. We were fortunate to host Neil and Carly, whose coverage and breadth of knowledge made for a fascinating discussion.
In our discussion, Neil first provides a detailed overview of key trends driving market performance, highlighting a shift from a broad sectoral view to a more focused approach on stock selection and performance dispersion. He emphasizes the significant performance differences among companies based on operational execution, capital allocation, and management quality. On the oil and gas side, Neil notes that range-bound commodity prices have reinforced the need for disciplined positioning, with an emphasis on capital efficiency and balance sheet strength. Carly walks us through key trends in utilities, including the surging focus on power demand driven by AI, data centers, and industrial expansion. We explore the growing interconnection between energy and technology markets and its impact on investor behavior, including how generalist investors are increasingly shaping energy sector valuations by focusing on growth and ESG considerations. We discuss the evolving natural gas landscape, the mounting pressure on power prices, and shifting attitudes among tech companies toward energy sourcing, with reliability and speed to market taking precedence over sustainability. We examine trends of investors seeking more access to company boards, the importance of engaged and visible boards in maintaining investor confidence, power price trends, how utilities can sustain investor confidence by tying equity raises to accretive growth opportunities, the role of power forward curves, best practices for managing earnings calls, and more. We greatly appreciate Neil and Carly for sharing their time and perspectives.
For additional insights from Neil, we previously had the pleasure of hosting him on COBT in September 2022 (episode linked here).
To start the show, Mike Bradley highlighted that the 10yr bond yield has plunged to its lowest level (~4.2%) of President Trump’s second term. Bond markets are growing increasingly concerned that Canadian, Chinese & Mexican tariffs will lead to retaliatory measures against the U.S. which could impact/slow U.S. economic growth. He noted that bonds are now dialing in three interest rate cuts for 2025, and that on the broader equity market front, equities have become increasingly more volatile. He discussed the big intraday volatility on Tuesday in the Dow Jones Industrial Average (~750-point intraday swing) and that the S&P 500 was down ~3% over the last week (due to souring investor sentiment) and was approaching technically oversold territory. On the crude oil market front, WTI price slid to ~$68/bbl this week (approaching low-end of its 6mo trading range) due to OPEC+ unexpectedly signaling its intention to begin unwinding long-held oil production cuts, beginning in April. If OPEC+ does follow through with oil production increases, as planned, then it’ll further widen the 2025 global oil surplus unless its offset by yet unannounced Iranian sanctions by the U.S. On the Energy equity front, the YTD performance dispersion in the Energy sector, and especially
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