Notations On Our World (Special Edition): On Our World as June 2024 is before us

 As June is before us, we present the following courtesy the Team at Goldman Sachs:

The global gas market is likely to grow 50% by 2029

The oil and gas industry is undergoing a major transformation. Growth in oil investment is showing signs of eventually peaking in non-OPEC countries, while investment in liquefied natural gas (LNG) is expected to increase more than 50% by 2029, according to Top Projects, Goldman Sachs Research's 21st annual analysis of the energy sector. The report projects the global gas market to grow 50% during the next five years.

As oil growth peaks, the industry is looking for short-cycle, short-life projects, which is reducing long-term oil supplies, says Michele Della Vigna, head of Natural Resources Research in EMEA for Goldman Sachs Research. Oil companies are expected to generate attractive returns to shareholders and good per-share growth if global oil prices stay in the $80-$90 range.  The industry will continue consolidating through mergers and acquisitions in the face of declining oil demand, with the potential for more trans-Atlantic mergers as European producers seek higher valuations in the US. Meanwhile, the global supply of LNG is expected to rise by 80% by 2030, driven by new projects in North America and Qatar. The increase in LNG production is likely to end the recent energy crisis in Europe.  US dominance as the world's largest LNG exporter will continue through the end of the decade, Della Vigna predicts. “Just based on what's already under construction, the US will double energy capacity, which is extraordinary,” Della Vigna says. Read our full article on Goldman Sachs' forecasts for the oil and gas industry.

Investors like companies that are onshoring their operations

Investors feel more bullish about companies that have closer geographical control over their operations, according to Goldman Sachs' Equity Structuring group, which maintains a Global Onshoring custom basket of equities. The basket, which holds companies that have onshored their supply chains, has outperformed the MSCI World benchmark by roughly 6% year-to-date, as of May 22. The US version of the “Onshore” basket has outperformed a corresponding US “Offshore” custom basket of equities by 9% during the same period. In the US, several factors have converged to create a favorable backdrop for companies that benefit from the onshoring trend. These factors include US industrial policy; world events such as Covid, supply chain disruptions, shipping disruptions, and geopolitical events; and lower relative energy costs. Furthermore, these tailwinds aren't likely to stop soon. Among US companies, onshoring or “reshoring” investment has been concentrated in the semiconductor and technology sectors.

Although these big supply chain moves could come at a price, raising the cost of goods sold and lowering margins, “that is not being reflected in the stock prices or earnings revisions,” equity strategists Louis Miller and Faris Mourad write in their team's report. So far, they add, “companies exposed to the onshoring of US supply chains have structurally outperformed companies whose supply chains are predominantly in China.”    Earnings revisions are favoring companies with onshoring plans and their beneficiaries significantly more than those relying on offshore footprints. “The valuation on the other hand seems to be unchanged,” our strategists write, “providing an opportunity for investors as we expect this earnings trend to continue.”

Can private equity bounce back?

Gina Lytle (L) and Mike Nickols (C) of Global Banking & Markets talk to Allison Nathan of Goldman Sachs Research on Goldman Sachs Exchanges

The private equity industry, which enjoyed eye-popping growth, strong investor interest, and strong performance in the years after the financial crisis, is maturing and likely entering a period of slower growth. “The period over the next five years is going to be getting back to normal. So slower growth, yes — but still growth,” Alex Blostein of Goldman Sachs Research says on Goldman Sachs Exchanges. As the industry matures, private equity firms are looking to other channels, such as wealth management, private credit, infrastructure, or non-US markets such as the Middle East and Asia for new growth opportunities, he adds. The last couple of years have presented challenges for private equity as a series of Federal Reserve rate hikes raised the cost of capital. A weak IPO market also limited the ability to exit deals and return capital to clients. Today firms are sitting on an estimated $2.5 trillion of dry powder in funds they have not been able to deploy — and as much as $5 trillion including leverage — which they're still looking to invest, according to Blostein, who covers asset managers and capital markets. Mike Nickols of Global Banking & Markets says he is looking for green shoots in the IPO market and signs of the Fed preparing rate cuts to help spur a better environment for deals. “If you think about where the industry is going, it's a cyclical space, and we think we're in the middle of a cycle now," he says. "And I think there is a lot of runway looking forward for the space to grow in a meaningful way from here.” Despite a slower pace of deployment, dealmaking activity is starting to pick up, notes Gina Lytle of Global Banking & Markets. “On the exits that we've been seeing, PE managers are getting more creative,” she says. “We're seeing a general trend of companies that are staying private for longer. And we're also seeing a lot of minority and co-control deals where they're partnering with other sponsors. They're looking to do continuation funds. They are looking to structured equity solutions and also fund financings. And so there's a lot of innovation and creativity that sponsors are bringing to the table so they can drive more liquidity into this market.”

The AI trade is broadening into the energy sector

In first-quarter earnings calls, 41% of S&P 500 companies that had reported through May 15th mentioned AI, according to Goldman Sachs Research. That compares with 23% of companies mentioning AI in the first quarter a year ago.  Many of these mentions emerged in the tech sector, of course; around 87% of tech companies referred to AI in their calls. But the AI trade “has begun to broaden…particularly to companies that the market expects will be needed to enable the use of AI technology such as data centers and utilities companies,” David Kostin, Goldman Sachs' chief US equity strategist, writes in his team's report.

One sign of this broadening lies in the statistic that nearly 70% of S&P 500 energy companies mentioned AI on their earnings calls, up from 19% in the fourth quarter of 2023. Since the start of March, a basket composed of energy producers that benefit from rising power demand has outperformed a basket of companies pursuing or enabling AI technology. Goldman Sachs Research expects US power demand growth to accelerate to an annual average of 2.4% until 2030, from 0% the previous decade, driven in part by the needs of AI.