The Dividend Cafe - Unapologetic Energy Bull: Meet Me in the Middle

Episode Date: September 25, 2026

Today's Post - https://bahnsen.co/4rwGwnT David Bahnsen hosts the Friday Dividend Cafe and explains he chose to focus on an energy investment theme rather than the week’s surge in bond yields. He argues investors and media overemphasize headlines about the Strait of Hormuz, Iran, and WTI prices, while the energy sector remains largely ignored due to its small S&P 500 weight (about 3.5% versus Apple at 7.4%, and midstream at 0.5%). He notes oil supply disruptions have been buffered by large inventory drawdowns, and that energy equities appear disconnected from oil’s move, with valuations running about 70% of their historical relationship to the broader market. He makes a bullish, longer-term case tied to AI-driven power needs and highlights midstream “2.0” fundamentals: rising domestic and global natural gas demand, expanding LNG export capacity, hard-to-permit pipelines with inflation-protected contracts, better governance, lower leverage, and strong distribution growth potential. 00:00 Welcome And Setup 01:07 Why Energy Is Ignored 05:03 Index Weighting Reality 08:49 Hormuz Supply Shock 11:55 Oil Versus Stocks Gap 14:08 AI Needs More Power 15:16 Valuation Case For Energy 17:14 Midstream Opportunity 18:24 Midstream PTSD And Comeback 19:51 Midstream 2.0 Tailwinds 22:20 Pipelines And Capital Discipline 25:15 Wrap Up And Takeaway Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Well, hello and welcome to the Friday Dividend Cafe. I am your host David Bonson. I had a tough time this week on the topic. And that is not normally the case when I have made a decision of what I want to write about on Monday. I actually love going into a week with a topic determined and sort of marinating on it throughout the week. But then by Wednesday or so as bond yields were moving higher and it seemed to be the obsession in the media and in financial markets, I thought, yeah, you know, the 10 year and 30 year making these new highs, we ought to cover the bond yield issue. But I was already kind of into the right mental space of this energy thing. that I'm going to be talking about today, and I decided to keep it. The Bond yield story is not going away, so I can cover it next week,

although the problem is I have another special thing I want to do with next week. So I'll get it all sorted. You have to hear from me enough that I shouldn't worry about whether or not I'll be able to fit in everything that I want to say to you. I'll find a way. Don't worry. But the energy thing we're going to talk about today is a little different than the way I think a lot of people in the investment space are thinking about energy. There's a link in

divinitycafe.com today, but I was on the mornings on Fox Business Show on Monday to kick off the week a few days back and was asked a question about the volatility of oil prices and what it meant to some of the great oil companies. I think it was a perfectly fair question and well asked in the context of that interview. I hope it was well answered by Yours truly, but it's indicative of the way I think a lot of people continue to think about the energy investment story to the extent anybody's thinking about it at all, which is another thing we're going to talk about here. And that is that this notion of oil prices and particularly the impact of the Strait of Hormuz in the Iran War on oil prices being the kind of central story

of energy investment. And I don't agree with that. I don't agree with that at all. And I'm going to make the case today, first of all, how people should be and why people should be significantly more bullish on the energy investment story and opportunity. And it's not something I do with this much conviction

very often in the dividend cafe, which is a lot more macro-minded. But I want to get in the weeds here today and make a case on energy investment, but reframe the reasoning behind it. Okay, so that's what we're going to spend our time doing. I said that what investors are talking about, they're talking about it in this kind of limited or truncated sense about the news headlines, Hormuz Iran, and of course what that means to WTI crude oil prices. That's fair enough, but I don't want to overstate the point because

there is an argument to be made that people are not really thinking about it at all. First of all, the reason I guess you could say this isn't important a lot of investors is kind of the inverse argument as to why I say that the AI story has become so important for so many investors. When people tell me, oh, I'm not in Nvidia. I'm not doing this levered tech sector stuff and Mag 7 and blah, blah, blah. and I make the point all the time that this has now become your story as just a regular index investor, whether you like it or not, when certain names, certain sectors, certain sub-sectors have become at a level of concentration within the index that is absolutely unprecedented and dramatically so in history. So I make that argument a lot. And if you inverse that logically, when energy started off the year as 2.9% of the S&P 500,

and as I sit here right now, it is 34% of the S&P 500, then it is somewhat understandable why it just simply isn't on the radar of a lot of people. You know, energy is up this year. As a sector, I believe the IYE is up 38%. And that's why the sector wading is moved all the way from 2.9 to 3 and 3.5. But my point is that when something is up 38% and it's a few basis points to your portfolio, why should you care? And that's kind of where the index reality is for a lot of people. Let's put this in a little bit more context.

All of the energy companies in the S&P 500 put together are equal. to substantially less than half, substantially less than half of Apple, one company, which is right now 7.4% of the S&P 500. It's a wonderful company. It's a very, very successful company, but more than two times the entire energy sector.

Now, by the way, that is the entire energy sector. What if we just looked at midstream energy? It makes up a whopping 0.5% of the S&P 500. So now you have one company, again, a massive market cap with massive cash flow and earnings, that is 14 times the entire energy infrastructure. Think of pipeline, transport, storage, infrastructure. 14 times that relevance to the United States stock market. I think the idea that how our energy needs are provided, how oil and gas gets to us,

gets to refineries, gets to other countries that we sell it to, how those end products come to be when you look at the end products that come out of natural gas liquids. And I'm thinking of butane, propane, ethane, where ethanol comes from. When you think about these things and the relevance in the economy and say, that's kind of interesting. It's 0.5% of the S&P. And with all of the production and exploration and drilling added on and all the refineries added on, it's 3.3.5%. This is an ignored sector, period. And so it does make for a kind of self-affirming prophecy.

If one is heavily overweight energy and it does real well, they're very likely to, quote, unquote, outperform. And if they're very overweight energy and it doesn't do well, then they're very, very likely to not. And so that is what it is. But my point is that you're dealing with something that the vast majority of people don't have to care about for the kind of inverse reason that the vast majority people do have to care about the AI story relative to the way their vanilla portfolio might be invested. Well, what I do not want to do in the Dividend Cafe, I alluded to do before. First of all, I wrote a Dividendon Cafe right when the Iran War started,

where I was making this philosophical case about the importance of energy and how economic reality is essentially a story of energy transformation. And that thesis, I stand by entirely, but it's different than what I want to get into today. When I argue that economic activity is energy transformed, that transforming energy generates wealth for societies, the historical argument and the kind of economic argument behind it is very important. First of all, it presupposes that a country or a society has energy to transform and that they transform it well. America is a blessed country on both of those fronts. but I want to do something a little bit more than just these kind of high-level realities that, again, you could think of as somewhat philosophical,

and get into some specifics that I think of a lot of investment application today. Now, when I say I want to do this without just relying on the current Strait of Hormuz argument, this is not to say that supply particulars don't matter. First of all, there were 20 million barrels a day that, were going through the Strait of Hormuz before the Iran War. It got down to about 2.7 million in the spring. You had about an 85% reduction, which is just incomprehensible in what you would think that means to global supply.

My understanding is that that number is improved to about 6.5 million barrels now. So instead of an 85% reduction from pre-war levels, it's 68%. I mean, that's still a big deal, and it largely explains why we're sitting here in $92, $93 oil right now. But there's a chart I want to put up right now that shows you the level of inventory buildup that took place last year and inventory drawdown now. The IEA estimates that 507 million barrels have been drawn down from pre-existing inventories since the war. began. So more than 300 million barrels of emergency stock of oil has been released globally. That's 2.8 million barrels per day for six months that have come out of a pre-stocked inventory. In other words, a lot of this missing supply was straight-of-form lose closure as much as it did

push oil prices up could have been so much worse if it weren't for the fact that we've largely and I don't mean this in the U.S., but globally, been living off of yesterday's oil to replace the production that is not happening today. Now, the state of Hormnese is not everything. First of all, Saudi has had other ways to get oil moved out of the Gulf. The United Arab Emirates has had other ways. There are other things that can happen when you have a supply shock primarily demand erosion that can help soft. that can help soften the impact of prices. We haven't necessarily seen a ton of that,

but we've seen some, at least on the margin. I think the interaction between supply and demand is one of the most basic of economic laws and its relevance in the whole oil story is significant. But what I would suggest to you is that in the short term, oil prices moving higher because of supply constraints and then being buffered to some degree by a drawdown of inventories,

that that is not the entirety of the story. Demand does remain strong, and I get that this is a pretty good position in 2026. You could argue maybe some of it's reflected in stock prices now, but it is not the subject to this dividend cafe. If I were a betting man, and I am not, and it is not the subject, it is not the base of the thesis. But if I were to think through this in a short-term context,

intermediate term, regardless of how Hormuz plays out, I would guess that China's demand will meet expectations, if not surpass it, that supply will remain constrained, and I would say that most U.S. producers at a general level will remain capital disciplined. That's all a pretty good set. up. But I would also tell you that to the extent there is a relative relationship between oil prices and the kind of energy sector within the S&P 500, there's a big margin of error here.

And I do not think current stock prices are reflecting where those dynamics are. So you get all at once perhaps a bit more defensiveness than people realize. is embedded and perhaps a bit more offense for those focused on the current supply demand story. The chart here shows this. I'm going to put this second chart up regarding the kind of historical relationship between energy within the S&P versus oil prices. And you can see that there's a big gap between the two in that historical relationship. So look, I am not making the case. for the integrated plays, the kind of big upstream companies that are globally diversified nearly on the headlines. I do think supply demand factors are favorable. I do believe capital

allocation has proven to be far better, more prudent. I understand that our focus has been and will be on less levered names and those with a history of prudence in the way they manage their business with verified through decades of dividend sustainability, that fortress balance sheet behind it. I think all of that stuff is true. What I would say to you is that if you believe in the AI story and you separate it from the energy story, then you do not understand how the AI story is supposed to work,

that the AI story is so incredibly dependent on further power, on such high power demand, and that power demand electricity production requiring so much more oil and gas, it is not discussed nearly enough. There's a demand catalyst that is much longer term than the short-term scenario around Strait of Hermuz supply shock. I find that to be very compelling. And yet, you could argue that overpaying for those fundamentals

then becomes the problem. Because once the energy story is tethered to the AI story, and if I believe so much of the AI story requires you to overpay, which I do, then the valuation subject becomes a matter of question for energy itself. And yet, energy's earnings right now, the energy sector is about 5% of the total weighted earnings of the S&P 500, and it is less than 3.5% from a market.

market cap standpoint. Look, not even financials have as big of a delta between their percentage of market cap and the percentage of earnings. Financials are about 12 and 15 respectively, and as a percentage differential, energies is even further disconnected. Now, the forward P.E. for the energy sector is always less than the S&P 500s for a lot of really good and understandable reason. The historical relationship is baked in over time between what the S&P's multiple is going to be and what the energy sector's multiple is going to be. There's a relationship there that already factors in, that there's higher CAPEX needs and energy, that there's lower growth rates than, for example, the technology sector.

but the noteworthy piece here, and I'm going to put another chart up right now, is that factoring in that historical relationship, the energy sector's valuation relative to the S&P is only 70% of its own historical average. I do find this quite bizarre. I also find it tantalizing. So let me summarize this before I move on to where I think the lowest-hanging fruit in the energy story may be. And that is the short, intermediate, and long-term story behind energy presents a solid investment case, but does not force us to grossly overpay and move out on the risk curve in a way that I don't want to do.

But that requires me now to look at where I think people can get almost outside of a crude oil conversation entirely. And that is the midstream energy story. I say a lot that I want you to meet me in the middle, that the upstream story has a lot of commodity price volatility, the producers, the drillers, that the downstream story has a lot of cyclicality and also volatility, the refineries, but that in the middle represents something that ought to be much more attractive and yet has created a couple

of what I call investment PTSD moments that caused a awful lot of investors to go away and to not come back. And I say investment PTSD versus PTSD because I don't want to belittle real PTSD which is often, you know, folks who went through something, let's say, in combat that is worthy of the name

in what the trauma that goes on. And I don't think any of us sitting here looking at a screen dealing with investment dynamic should ever be allowed to use that term in the same context. But nevertheless, in the investment jargon I'm dealing with, what happened in 2015 when OPEC attempted to go after the U.S. fracking industry by flooding the world with oil and what happened again in 2020 with Saudi and Russia and that dynamic and the midstream sector's downturn in that time, period definitely left a investment dynamic for an awful lot. And I don't say that, explain it away

or even express sympathy. I'm not flattering these people because in 2021, the MLP midstream space was up 40% in 22, 31%, then 26 and a half, then 24 and a half, then 10, now year to date, 24%. These are stunning comeback numbers that a lot, a lot of people, the vast majority of people, it's 0.5% of the S&P 500 missed out on. And yet the recoveries you've seen notwithstanding, I think that what took place in these past bad moments of very poor capital discipline in some cases, very poor governance, overly saturated markets, obviously the shenanigans from Saudi OPEC, Russia. Look, it caused a lot of people to say,

never mind, I'm going to look elsewhere. But what is missed is that not only have you had this great recovery, what I think skeptics fail to understand is how different the fundamentals are and the story is now in what you can refer to as this midstream 2.0 moment, where natural gas demand is leading the way at cheaper and cleaner fuel that is replaced coal as the primary driver of electricity production in our country.

The business model largely on a pay-to-play system where it does not matter what the natural gas cost that's going through it, that there are much healthier counterparties and much more favorable contracts that mitigate commodity risk, regardless of what the overall investment sentiment is, the fundamentals largely mitigate some of that commodity risk.

This natural gas demand, I talked, about is domestic. You look at our, I mentioned before, the natural gas liquids. The amount of plastics and petrochemicals and cosmetics and household items that we get with a natural gas liquid derivative is stunning. The way in which our homes are heated and electricity is produced, the way we feed ourselves, these are just core elements that are clearly secular and structural in nature. And natural gas is abundant and needs to be moved. And that is a domestic story that I believe is irresistible. Now, it's also a global story.

Our capacity to export liquefied natural gas is going to more than double in the next five years. So I think that we're going to continue needing food and heat. And there may be some other say, no, AI is going to mean you don't have to eat anymore. I don't know if anyone's actually saying that. I would imagine I could find someone on the internet who is. Some of the things that get said about what AI will do for us are just in that vein of ridiculous. But I just want to point out that if you actually believe that AI is going to do this or that, then you should be an even bigger natty gas bowl because you can't get AI to do any of these unbelievable things

without data center build. And data center build requires power and the power requires natural gas, period, point blank. So look, moving this natural gas around requires pipelines, and the pipelines are not easy to build. They're not easy to permit. There's a tremendous value where there is incumbent legal rights for pipelines. The contracts have embedded inflation protections more often than not that favor the pipeline companies. And so the fundamental story becomes the exhortation of volume growth, pricing power that is there, creating enhanced distributions.

This is a very enviable business story. And I think when you combine it with the improved capital discipline that exists in the space, much less leverage than we had before, much stronger balance sheets, much more self-reinforced CAPEX versus requirement for dilutive equity issuance, you have a really, really attractive capital story attached to a very attractive fundamental story. There is a little anecdotal paragraph about the White House idea of a diesel fuel export ban. I'm not going to get into it right now, but there's some links in Dividendon Cafe. I do think the White House, if they were ever serious about it, is now walked away from it.

But that's touched on at Dividendoncafe.com if you want to look at some of that. I will pull this to conclusion here. The fundamental takeaway is this. I'll read it directly from the conclusion of Dividy Cafe, okay? I believe investors, not looking for a weekly return timeline or monthly return timeline can look to the energy sector at a time when very, very few others are and find attractive valuations and fundamentals, especially in the midstream space, find a structural argument with literally a half-dozen tailwinds to be excited about.

I think this is a very good idea in what often feels for investors like a world gone mad. So I will leave it there. Thank you, as always, for listening, reading, and watching the Dividing Cafe. Have a wonderful weekend. I will be with you on Monday for our normal Monday Dividing Cafe. It's going to be a very great week ahead and enjoy your weekend and beat the ducks and fight on and play some defense.

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