Election Week ‘Clarity’ –

From Morgan Stanley: Key Stock & Sector Impacts Latest data points to a “divided” government, likely limiting legislative action. While the possibility remains for a more stringent regulatory backdrop under a potential Biden victory, much of this “risk” is already priced into Energy equities, underpinning an increasingly attractive risk-reward. Divided government policy paths suggest a more constructive backdrop for Energy vs. pre-election expectations.

Into election day, investors broadly anticipated Democrats would gain control of both the presidency and Congress, relying on polls that heavily favored a “blue wave.” Under such an outcome, we had outlined a wide range of potential policy implications, that in some of the more extreme scenarios, could meaningfully constrain the oil & gas industry (see US Election Playbook). While final vote counts remain outstanding, polling results now suggest a greater possibility of a split Congress, with clarity on the presidency potentially taking several days (see our Public Policy team’s note, Three Early Lessons from a Late Night). Importantly, lack of single party control in Congress means legislative options to constrain the oil & gas industry could be effectively “off the table” — a key tailwind for the sector.

More broadly, fiscal stimulus is likely to be smaller or “reactive,” a modest negative for the energy macro. Net-net, we see a potential divided government as positive for the Energy sector relative to pre-election expectations, regardless of the outcome of the presidency. Control of the White House remains uncertain, but the impacts are more limited under a split Congress. Under a possible Biden presidency, we would still see potential for more restrictive regulatory policy, though much more moderate relative to pre-election expectations.

Conversely, under a second Trump term, “status quo” energy policy would have limited direct financial benefits for oil & gas companies, though remove key risks such a resurgence in Iranian oil supply or drilling restrictions on federal land — a scenario we expect would drive a sharp rally in most exposed equities — EOG, XEC, COP, CXO & DVN.

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Energy Post Election Outlook 11.5.20